When to Save Your Money and When to Invest
If you want your money to work for you, there are two main ways to achieve this goal: saving and investing. Knowing which option to choose is critical if you want your money to work the hardest.
Here are some ways to prioritize the two:
Start With Savings
Putting money into a savings account of some sort is a good way to get your money slowly working for you in a safe place.
While it’s recommended to have funds saved up to cover you and your family for six to 12 months in the event of an emergency, if you’re just getting started, focus on setting up an emergency fund for at least one month of living expenses. Losing a job, a hospital visit or unexpected car repair qualify as emergency expenses, while buying a new wardrobe or taking a vacation don’t.
Once you have an emergency savings account set up and in good shape, consider a financial goal that you want to reach within five years. This can be anything from saving for a down payment on a house to paying your annual car insurance bill in one payment. Or it could be for a major vacation you want to take a year (or more) down the road.
If you’re putting money away for an event that isn’t right around the corner, you might not need immediate access to it as you would an emergency fund. In this scenario, you may find a better rate of return on a certificate of deposit or similar savings vehicle your bank offers.
When to Invest
If you’ve found a savings account with FDIC insurance for up to $250,000, which should be easy to find, your money is in a safe place—and returns are guaranteed.
After your savings plans are in place, it’s time to look at long-term investments in the stock market, which can net you bigger returns than savings accounts.
The best place to start is investing money for retirement. If your employer offers a 401(k) retirement plan match or other retirement savings plan, it’s like giving your future self a raise. A company that matches a percentage of your contributions is like getting free money. Even if you’re just starting an emergency fund, you can put money in a 401(k) as a way to increase your long-term savings.
If you have more money to invest after contributing to a retirement plan, don’t do it until you’ve paid off high-interest debt such as credit cards and student loans. If you’re planning to retire soon or want to save so your kids can afford college, you should save for those before investing.
Then it’s time to invest in stocks or wherever you want to invest your money. Ideally, this should be money you can afford to lose, which is possible in a stock market that can be volatile.
This article is intended for informational purposes only and should not be construed as professional or legal advice.