Money makes the world go around, whether we like it or not.
For most of us, it can be difficult to find any extra cash that we can afford to put away each month after we’ve finished paying for things like bills and utilities. However, if you do end up with some extra cash, you might be wondering how you should use it.
Is it a good idea to stash that money away for a rainy day, or would you be better off putting it to work in the form of an investment instead? Let’s find out.
The Difference Between Saving and Investing
Both saving and investing are good strategies for your money. The difference is that with saving, you put a small amount of your money aside into a separate location and hold it there to use later. You might not earn anything from your savings unless you happen to have a bank account with a pretty great interest rate – but you know that the money is there if you ever need it.
Saving is usually the right call when you have no emergency funds to fall back on in case something goes wrong in your life. It’s hard to know for certain if you’re going to end up losing your job or getting a bill in the post that you can’t afford to pay. Your savings prepare you for the worst, whatever might happen.
Investments, on the other hand, make sure that you’re putting your cash to work for you. With investments, you spend a little money now, to make more in the long-term. Some people even take out small personal loans so that they can get in on the ground floor of investments and gather more wealth over time. You don’t just leave your cash sitting in a different account when you’re investing, you work on making that money grow!
Why Investing is Almost Always the Right Idea
Although it pays to have some savings in an emergency account that you can use when the going gets tough, the truth is that you can always turn to loans if you’re ever hit by a major upheaval in your life. Investing is the only way that you can make the money that you have now worth more in the future.
With investing, you:
- Stay ahead of inflation: If you’re not investing in opportunities to grow your money, you’re actively losing cash over time. This is because of something called inflation. The rate of inflation varies widely, but usually, each year, your cash loses its value by around 3%. On the other hand, if you invest your money and earn a return of around 6%, then you stay way ahead of the curve.
- Prepare for the future: In order to have enough money to retire, you’ll need to make sure that you’re constantly putting cash towards your future. Fortunately, with investing, you can take advantage of something called compound interest. With compound interest, you invest $100 into a stock or share, and in a year, that share might earn $10. Now, you’ve got $110 in your account. If you continue earning interest at the same rate (10%), then the next year, you earn $11 instead of $10, and the cycle continues.
- Save on taxes: Another huge benefit of investing your money instead of just saving it is that you can save on taxes. The money you put into a traditional IRA or 401k, for instance, doesn’t get taxed the year that you earn it. Instead, you pay taxes when you withdraw your money later. This can save you some serious cash during the years that you contribute. You can use the money you save to pay off your loans faster and get rid of the extra expenses that could be stopping you from saving and investing more.
Saving and Investing Are Crucial to Your Future
Ultimately, both saving and investing have their own parts to play in helping you achieve your goals in the long-term. The only time you shouldn’t be saving or investing is if you have something else that you need to do with your money right now, like paying your bills. If you’re nearing 30, it’s particularly important to consider investing, because the younger that you get started, the more you’ll earn in the long-term.
The stock market generally delivers more benefits than cash in the long-term, which offers a better opportunity for returns on your money. Don’t just leave your cash to stagnate! Do something with it!
Founder of Technical Traders Ltd.