
While cash is king, paying bonuses with stock shares and equity is a powerful...
by Jonathan AnthonyInvesting in stocks of some kind and building up a robust liquid saving account is crucial for good financial health. Though they are both necessary elements of a proper portfolio, they are not identical. Knowing the difference between the two is essential, as is knowing when it’s best to choose one over the other.
There are more than a few disparities between savings and stock accounts, one of which is the risk factor. A savings account is essentially risk-free, although it has a much lower return rate than stocks, which offer high returns with increased risk.
Your goals are also important. Stocks tend to cater towards more long-term goals, while a savings account has much more fluidity, ranging from short to long-term goals.
When saving money, you’re obviously not spending it, but more importantly, you’re putting it somewhere accessible for future use. That can be a savings account, a CD (certificate of deposit), or even physically storing it in a shoe box under your bed.
Investing money requires using capital to buy specific assets, such as stocks, bonds, or real estate. The goal is to grow your money and earn profits over time.
Though many people use the words “saving” and “investing” interchangeably, there are some key differences between the two:
Putting money into a savings account first is a great way to build your portfolio. Build up an emergency fund or “nest egg” to have stability and easy access to funds should an unexpected expense arise. Once your savings account gets established, you can begin investing some of your money.
Many experts agree that having savings for unexpected emergencies should be the first reason you set extra money aside. Keep saving until your emergency fund covers at least three months’ expenses. However, some experts advise up to 6 months’ worth.
Not everyone has the extra cash to set aside a massive nest egg. The act of “fast saving” is how many people streamline their budgets. An example of this would be putting money into an account for a specific purpose each month, like paying your mortgage or making a rent payment.
Short-term saving is also typical if you plan on using the money within a set amount of time, typically a few years. Examples include saving for a down payment on a house or saving up to pay for a wedding.
The best time to use a savings account is when you’ll need short-term access to the money. Whether for a car, patio furniture, or a kid’s college tuition, you’ll want access to all the money you’ve been putting aside when the time comes.
While it could have grown with an investment, there’s always a chance that the market is lower when you go to use the money, and the amount you have access to is smaller than anticipated.
When investing in the stock market, you usually seek long-term growth. Maybe you’re planning to retire, or you want to build up your assets over a longer time horizon and increase your net worth, so you have something to leave your family.
Stocks, bonds, and even real estate can be volatile in the short term but historically pan out in the long run. So, to get the return you want, the investment horizon needs to be inherently further out.
Many people invest in the stock market for retirement through a 401(k) or a Roth IRA. This type of investment can span decades and continually grow as the interest gets reinvested and compounded over the years.
Investing and saving simultaneously is ideal, although it does not always play out this way. If you are not doing both and are wondering if it’s the right time to invest, ensure you have a few things in order first.
Yes, you should try to get your emergency fund filled out first. However, there is one instance where it is wise to invest before you have that in place.
You should always aim to maximize your 401(k) or Roth retirement accounts if your employer matches your contributions to any degree. Many companies match 2, 4, or even 6% on retirement accounts. The match is free money; unless you are genuinely in dire circumstances, you should make this contribution at all costs.
Below we’ll look at some of the pros and cons of each type of savings to give you a better idea of which is correct for you right now.
Both investing and saving are going to be critical parts of building a solid financial portfolio, so one is not fundamentally better than the other. However, each one serves a different role throughout your wealth development.
Investing is going to build up in the long run. However, it is of paramount importance to make sure you are ready to invest beforehand, otherwise, you will be setting yourself up for drawbacks. When high-interest debt is snowballing, or you are one emergency away from financial hardship, you’re not ready to start investing.
Building an emergency nest egg in a savings account gives you security and peace of mind. Those things will allow you to start building wealth in other ways.
Below are some other questions that we hear our users ask about saving and investing for the future.
That depends. For specific purposes, such as saving for a down payment on a house or a wedding, a savings account will be a much better option. As an investment, stocks tend to do better than cash over the long term, but their volatile nature means you could end up with less when you need it in the short term.
You can use a brokerage or money market account like a stock savings account by buying stocks, bonds, mutual funds, and ETFs and letting the money sit there for a while. Just remember the time horizon needs to be further out to see stable results.
Investing of any kind is excellent and gives you a substantial leg up when it comes to building wealth. There are an incredible amount of individual stocks, bonds, and other publicly traded assets on the stock market, each with a slightly different roll of the dice on their projected gains.
If your employer offers a 401(k) plan, especially one that they match, you should invest in that immediately. An employer-matched 401(k) is guaranteed free money in whatever percentage they match. Plus, your 401(k) will be catered towards your retirement and will come with unique benefits upon retirement.
When it comes to investments, everything comes down to risk tolerance. CDs are considered low-risk investments and have a fixed rate that you’ll earn. Stocks have a much broader range of risk profiles and are generally regarded as a higher-risk investment.
One is not better than the other. Your risk tolerance and investing goals will determine which is better suited to your needs.
CDs offer a fixed interest rate if you don’t touch your money for a specified time. A savings account will allow more flexibility to withdraw funds whenever needed.
Generally speaking, the best option depends on how frequently you intend to touch the money and how long you are willing to leave it in the account.
While cash is king, paying bonuses with stock shares and equity is a powerful...
by Jonathan Anthony“Hey buddy, what’s the quickest way to make a quick buck? Can...
by Naveen SundarThe equity markets have been on a tear over the last three...
by Naveen Sundar