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Other types of savings accounts include Certificates of Deposit, interest checking accounts, and money market accounts.
Investing Explained
Investing is when you purchase something with the intention of generating more income. Types of investments typically include stocks, property shares, or mutual funds. This method of saving typically makes your money less accessible because, in order to withdraw any dividends or earnings, you will first have to sell a portion of your assets.
There are many ways to invest, depending on how long you plan to leave your money invested, and your tolerance for risk. Many experts recommend investing only when you will not need the money for at least three to five years. Though investments can come with a larger rate of return than savings, there is a greater risk associated with them. It is possible to lose money in stocks when the market or company takes a downturn, or lose value in a property if there’s a natural disaster.
Comparing Saving and Investing
Saving and investing can both be a part of a healthy money management strategy. Take a closer look at the differences between the two to fully understand the benefits and drawbacks to each:
Should You Invest or Save Your Money?
Depending on how much money you have, your expenses, and when you may need those extra funds, you can decide whether you should save or invest. Neither option is necessarily better than the other, as it all depends on what your needs are. Here are some questions to ask yourself:
Do you have an emergency fund? Many experts don’t recommend investing unless you have some money already saved in an emergency fund. So if you don’t already have at least three to six months worth of expenses in savings, you should begin there to help offset the risk of investing.
Does your employer match your retirement? You should consider your long-term financial goals even if your retirement seems far off. If your employer matches a 401(k) or other retirement account contributions, you may want to invest up to the matching limit so as not to lose out on that money.
Do you have any high-interest debt? You should take into account the interest rates of your highest-interest debt before saving or investing anything that you don’t need for emergencies. Compare the interest rate of your loan against the average rate of return for savings accounts or investments. Most of the time you’ll lose money by investing or saving rather than paying down debt.
What are your short-term financial goals? If you plan on making a major purchase within the next year or two, it may be a good idea to put your money in a savings account. Not only is your money more easy to withdraw, but the amount you put into savings is less likely to decrease. Investments are less predictable, especially in the short term, and can even cause you to delay a major purchase if your account loses value.
Ultimately, only you can decide whether saving vs investing is right for your situation. Carefully consider your options since saving and investing can both set you up for a successful financial future. It can be overwhelming at first, so if you find you still aren’t sure, don’t be afraid to talk to a trusted financial advisor.
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