Asking this question probably means you understand the difference between saving and investing your money but are not sure which option is best for you. Saving and investment are both good ways of ensuring your future financial security—staying prepared for rainy days. Before saving or investing, you’ve got to be sure that your financial situation can accommodate either. If you’ve got debts or more important financial responsibilities at the moment, saving or investing may not be a good idea.
Anyway, saving and investing are two different things and engaging in one shouldn’t stop you from engaging in the other. You just have to be smart about it—know when it’s best to save and when it’s best to invest.
When Saving Is Better Than Investment
Investment doesn’t always come with bigger returns. While the money you save in your bank account may not grow, it won’t decrease either—all things being equal. And even though a rise in inflation will reduce the purchasing power of the money you have in your account, you will always be able to withdraw your money whenever you need it. This is why you should save rather than invest if:
1. You Are In Debt
Investing should be totally off your to-do list if you are in major debt. While it’s advisable to avoid saving and investing when you have loans to settle, saving may actually be a good idea. You don’t want to end up in more debts or be unable to afford some basic needs after you finish paying off your debts.
2. You Don’t Have An Emergency Fund
Everyone needs to have an emergency savings fund that they can fall back on when the unexpected occurs. The common rule is to save up to 3 months’ worth of living expenses in an accessible savings account. This fund should be able to cover rent, school fees, food, and other essentials.
3. You Recently Survived A Financial Crisis
If you just survived a financial crisis that wiped away nearly all the money you have in your account, stashing the little money you just earned into an investment plan will be unwise. A better idea will be to save as little as you can afford every day until you bounce back to your feet.
4. There Are Big Expenses Ahead
Why lock your money up in an investment that may not yield big returns and that’s not easily accessible when there are big and necessary expenses you have to make? Medical bills, car repairs, house rent and so on will always crop up and you need to set money aside for all of that. Invest if you know the outgoing money won’t affect your financial situation in the short-term.
5. You Just Experienced A Major Life Event
Major life events like the arrival of a new baby, wedding or divorce are capable of draining your finances. After going through this phase of life, it’s best to start saving for other short-term expenses that often follow suit.
When Investment Is Better Than Saving
One of the major pros of investing that makes it better than saving is that the same goal you want to achieve by saving can be reached with a lesser amount of money when you invest. If your monthly saving is 2,000 Naira for instance and you want to achieve a goal that will require N10,000, you’d have to save 2,000 Naira for five months till you get to 10,000 Naira. But with investment, you could save 2,000 Naira once and get up to 8,000 Naira investment returns.
However, since investment value may decrease unexpectedly and you can’t access your investment funds whenever you like, it is better you invest rather than save if:
1. You have long term goals
It’s best to invest for long-term goals like retirement funds or children’s college fees. Why? You won’t be needing the money for more than 8 to 10 years and that’s good because investment often thrives better than savings in the long term. While inflation will always affect the value of your savings, it hardly affects your investment returns.
Still confused about saving or investing your money? Consulting a financial advisor may be a good idea.
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