Invest Or Save: What's Best Now?

Whether to save or invest is a timeless money question, and the answer depends on your financial situation and goals. Saving and investing are two related strategies for achieving financial security. Saving means setting aside cash for future use, while investing means using cash to buy other assets that you expect to produce profits or income.

Financial advisors say that having an emergency fund should always be your first priority. Experts generally recommend setting aside at least 10% to 20% of your after-tax income for investing in stocks, bonds, and other assets. However, if you don't have an emergency fund or if you'll need the cash within the next few years, it's generally better to prioritize saving over investing.

On the other hand, if you have a topped-up emergency fund, have paid off high-interest debt, and have long-term financial goals, investing may be a better option. Investing offers the potential for higher returns but also comes with the risk of losing money.

Saving for emergencies

An emergency fund is a safety net, money set aside to help protect you when you face unexpected costs or a sudden drop in income. It is recommended to have at least $500, but ideally, you should aim for three to six months' worth of living expenses. This will allow you to easily meet unexpected challenges, such as car repairs or home repairs, without having to borrow money or increase your credit card debt.

To build your emergency fund, create a budget that prioritises saving. Track your expenses, set spending limits, and treat contributions to your emergency fund as a bill. Consider setting up automatic contributions from your paycheck or each payday so that you save consistently.

It is important to keep your emergency fund separate from your checking account to avoid the temptation to spend it. High-yield savings accounts or money market accounts can be good options as they offer higher interest rates than traditional savings accounts.

Remember, your emergency fund is for unexpected, necessary expenses that require immediate action. Examples include medical emergencies, car repairs, or home repairs. It is not meant for planned expenses or purchases, such as vacations or new electronics.

By prioritising emergency savings, you can gain peace of mind and better prepare for financial setbacks, ensuring that you stay on course towards your financial goals.

Investing for retirement

When it comes to investing for retirement, there are several options to consider. Here are some key strategies and factors to keep in mind:

Diversification

Diversification is a crucial aspect of investing for retirement. By spreading your investments across various asset classes, industries, company sizes, and geographies, you can minimise risks and maximise potential returns. This includes investing in a mix of stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other assets. Diversification ensures that your portfolio is not overly exposed to any single investment or market, reducing the impact of market fluctuations.

Long-Term Focus

Retirement investing is typically a long-term endeavour, and it's important to maintain a long-term perspective. Markets will experience ups and downs, but historical trends show that stock markets tend to provide positive returns over time. Therefore, it's essential to focus on long-term growth rather than getting caught up in short-term market volatility.

Asset Allocation

The allocation of assets in your portfolio should be aligned with your retirement goals, time horizon, and risk tolerance. Generally, retirement accounts can be the most aggressive part of your investment portfolio due to their long time horizon. Consider incorporating a mix of stocks, bonds, and cash investments, adjusting the allocation over time as you approach retirement.

Retirement Accounts

Utilise appropriate retirement accounts such as employer-sponsored plans (401(k), 403(b), 457(b), pension plans), Individual Retirement Accounts (IRAs), and self-employed or small-business plans. These accounts often provide tax advantages and can help maximise your retirement savings.

Professional Guidance

Consider seeking guidance from a financial advisor or a robo-advisor. Financial advisors can provide personalised advice based on your circumstances, goals, and risk tolerance. Robo-advisors offer a low-cost alternative, using computer models and algorithms to customise investments for your portfolio.

Emergency Funds and Short-Term Goals

Before investing for retirement, ensure you have sufficient emergency funds set aside to cover unexpected expenses. Additionally, if you have short-term financial goals, such as buying a home or paying for education, consider prioritising those goals with a dedicated savings plan.

Regular Reviews

Regularly review and adjust your retirement portfolio to ensure it remains aligned with your goals and risk tolerance. As you progress through different life stages, your investment strategy may need to evolve to reflect changing circumstances and market conditions.

Income Sources

Evaluate all your income sources for retirement, including annuities, pensions, Social Security, rental income, and other regular income streams. Understanding your expected income from these sources will help you determine how much to save and invest for retirement.

Risk Management

While investing in stocks can provide growth potential, it's important to manage risk, especially as you approach retirement. Consider gradually shifting your asset allocation towards more conservative investments to protect your retirement savings.

Annuities

Annuities can provide a guaranteed income stream during retirement, offering stability and peace of mind. However, carefully consider the features and costs of annuities, and review the credit rating of the insurance company providing the annuity.

Dividend-Paying Stocks

Dividend-paying stocks can provide a regular income stream during retirement while also allowing your principal to remain invested for potential growth. Opting for stocks that pay dividends can be a strategic choice, especially if you need income during the early years of retirement.

Bond Laddering

Building a bond ladder by purchasing bonds with staggered coupon and maturity dates can help smooth out your portfolio's yields over time and provide a consistent income stream. This strategy also helps manage interest rate risk.

Total Return Approach

Consider a total return approach, which involves investing in a diverse mix of stock and bond funds adjusted for your risk tolerance. This strategy focuses on generating a "total return" that meets or exceeds your withdrawal rate, providing income and continued growth for your retirement portfolio.

Remember, investing for retirement is a long-term journey, and it's essential to tailor your investment strategy to your personal circumstances and goals. Seek professional advice when needed, and stay informed about market trends and investment options to make informed decisions.

Weighing up risk and return

The relationship between risk and return is a fundamental idea in finance. Generally, as investment risks rise, investors expect higher returns to compensate for the increased risk. This means that the greater the amount of risk an investor is willing to take, the greater the potential return. For example, a U.S. Treasury bond is considered one of the safest investments and thus provides a lower rate of return compared to a corporate bond, which has a higher default risk.

When deciding whether to save or invest, it is important to consider your financial goals and risk tolerance. Saving is generally suitable for short-term financial goals, such as building an emergency fund, while investing is more appropriate for long-term goals, like retirement planning. Saving provides a lower return but is less risky, as the value of your savings does not fluctuate with external factors. Investing, on the other hand, offers higher return potential but comes with the risk of losing value.

To make an informed decision, it is crucial to understand your investment goals, timeframe, and capacity for loss. If you are investing for the short term, a more cautious approach is advisable, whereas a longer investment horizon may allow you to take on more risk. Additionally, consider your financial situation and comfort with risk. If you have sufficient disposable income and a secure financial position, you may be in a better position to tolerate higher-risk investments. Diversification is also key to managing risk. By spreading your investments across different assets and industries, you can reduce the impact of specific risks associated with particular companies or sectors.

In conclusion, when deciding whether to save or invest, carefully consider your financial goals, risk tolerance, and investment horizon. Saving is generally suitable for short-term goals and provides security, while investing offers higher return potential for long-term goals. Understanding your risk profile and diversifying your portfolio can help you make informed decisions and manage risk effectively.

Short-term vs long-term goals

Short-term goals are those that you expect to achieve within a few months or years. They are more immediate plans and may have more specific deadlines than long-term goals. These include vacations, large retail purchases, and recurring payments. When setting short-term goals, it is important to have a plan that is specific and attainable, and to plan ahead.

Long-term goals are usually big-picture items that may take several years or even decades to achieve. They are typically less specific, with more flexible timelines. Examples include retirement and paying off a mortgage. Due to the length of long-term goals, it is important to periodically revisit and modify them as life changes occur.

Short-term goals:

• Find a savings account that is easily accessible and has a high yield.
• Stick to a regular savings plan and create a realistic budget to help you achieve your goal on time.
• Set up automatic savings features to help you save effortlessly.
• Cut back on expenses by reducing utility bills, cooking at home, and cancelling unnecessary subscriptions.
• Sell unwanted items online to boost your savings.

Long-term goals:

• Open a retirement account, such as an IRA or 401(k), as early as possible to take advantage of compound interest.
• Consider opening separate accounts for different long-term goals to help you track your progress.
• Regularly review your budget to ensure that you are on track and that your long-term goals are not overshadowed by short-term ones.
• Explore passive income opportunities, such as investing in dividend stocks or creating a bond ladder.
• Focus on building your career and advancing in your occupation to increase your earning potential.

Remember, it is important to have a mix of short-term and long-term goals, and to tailor your savings strategies accordingly.

How to pick a savings account

When choosing a savings account, there are several factors to consider. Firstly, look for an account with a competitive interest rate. High-yield savings accounts typically offer higher rates than regular savings accounts, and some may offer an Annual Percentage Yield (APY) that is significantly higher than the national average. It is important to note that interest rates can change over time, so look for an account that consistently offers a high rate.

Secondly, consider the fees associated with the account. Ideally, choose an account that does not charge monthly service fees or has ways to waive these fees, such as maintaining a minimum balance. Also, look out for other fees like low balance fees, annual or monthly maintenance fees, dormancy fees, and ATM fees. Some accounts may even charge a fee if you withdraw money too frequently, so be sure to check the fine print.

Thirdly, look for special features that may be useful to you. For example, some accounts offer savings buckets to help you save for multiple goals, while others may come with an ATM card for easy withdrawals. If you prefer to bank in person, you may want to choose a traditional brick-and-mortar bank. However, online banks often offer better interest rates and lower fees, so it is worth considering your priorities when making your decision.

When choosing a savings account, it is important to do your research and compare the features and benefits of different accounts to find the one that best suits your needs.

Frequently asked questions