Saving or investing: When to save and when to invest

When I landed my first job, I was like any other ambitious young person who saw themselves achieving so much in the first few years of employment. Well, that somehow worked and somehow didn’t work. I desired to save as much as possible and accomplish all my goals within the shortest time possible. I was risk averse so I avoided anything that would tag along any form of risk on my funds. This means, of course, that any form of investment seemed so risky to me. Things didn’t always work out as I anticipated and in many instances, I found myself using all or part of my savings for things I had not planned for. This is the point where I started reconsidering my stand on risk, and slowly started being more open to appreciating and understanding the need for investing.

Saving and investing are, therefore, two terms that are very fundamental to a person’s financial security and anyone who is looking forward to determining how they should put their funds to work. The two terms represent different approaches that relate to managing personal finances. Saving entails holding money for future use in a low-risk environment, earning low returns in the form of simple or compound interest. This could entail holding money in financial institutions such as a bank’s savings account or holding it elsewhere, other than in financial institutions. On the other hand, investing involves holding funds in investments such as property, shares, or any other investment avenues to grow the money. Investments usually bear higher risks and higher possible returns.

Differences between saving and investing

· Whereas saving is more applicable when one wants to accumulate money for a short-term goal, investing applies more when a person wants to achieve long-term goals such as retirement.

· Saving bears minimal or no risk. The money saved is expected to earn interest and one is assured of not losing their principal deposit (the saved money). On the other hand, investments bear a higher risk. They are intended to generate and grow wealth, so their returns are potentially higher.

· Saving entails high liquidity because the money one can easily access the money when they need it. On the other hand, investments have lower liquidity because funds are not easily accessible. It takes time to sell an investment for instance property or shares thus requiring more time before one can access funds.

Factors to consider when deciding whether to save or invest

· Risk tolerance

Risk tolerance is the level of risk that one is ready or willing to allow when making a financial decision. The risk tolerance for different people defers and can be dependent on different factors such as income level, age, and financial goals, among others. Investing is riskier than saving and, therefore, saving will be more appropriate for a person who has a low risk tolerance while investing will be more applicable for a risk-tolerant person.

· Time frame

the time frame of the financial goals is another consideration when deciding whether to save or invest. Investing is more appropriate where one has long-term financial goals while saving is the best option where the financial goals are short-term.

Financial goals

Establishing financial goals will enable a person to decide whether it is more appropriate to invest save or apply both. Such plans may include a retirement plan, buying a home, paying for college, paying for a vacation, and so on. If a financial plan requires quicker access to cash, the best option will be saving. However, some plans might require both investment and saving. For instance, for college funds, one can invest and still be saving some money because this is payable over a while (over the study years or semesters).

Saving and investing are two important aspects that enhance financial security. Although the two occur concurrently in many situations, there are instances where a person needs to decide whether they should save or invest their money. The factors that guide these decisions include risk tolerance, financial goals, and the time frame for the financial goals. Hence, it is important to understand one’s underlying needs before deciding on going for either or both items.

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