Financial stability is one of the significant concerns among people due to the soaring cost of living and rise in debt. Most of the people have shifted focus from saving to investing because it helps earn for the future.
Unlike saving, investing leads to a good amount of return, which is why more and more people are looking forward to investing. Whether you should save or invest, it totally depends on your financial circumstances and financial goals.
Even though you can start building your investment portfolio with as little money as possible, this might not be the right choice because you do not even have basic financial planning.
Many of you interchange both terms. Saving is stashing away money for a specific goal – short term or long term – and for financial emergencies. Some common goals include wedding, holiday trip, and the like.
Investing, the other hand, means trying to build your wealth by buying a thing that increases in value. Buying land and property is the best example to understand how investing is different from saving. The value of the property keeps rising, and so is your wealth.
When should you save?
There is no doubt that you need to save money if you want to build your investment portfolio. Even if you want to make a smaller investment, you need to prepare your budget. Under the following circumstances, you cannot think of investing money.
- You do not have an emergency cushion
As the name suggests, an emergency cushion is an amount of money you put aside to meet unforeseen expenses. The rule of thumb says that you should have a six-month worth of living expenses. When your car breaks down or your laptop conks out, you can dip into these funds without seeking financial assistance from your friends and family.
Financial experts suggest building the six-month worth of living cost because it will allow you to tide over when you face unexpected unemployment. These funds can help you pay rent, food, and credit card bills.
However, you will likely face cash shortfall during an emergency even if you have an emergency cushion. This is when you can take out 1000 pound loans with direct lenders.
- You need funds for a planned expense
An emergency cushion aims at helping you meet your unexpected expenses, but you need to set aside money separately for planned expenses. For instance, if you want to go on a holiday trip, you cannot dip into your emergency cushion. You should put away money for your vacation separately.
When should you invest?
If you are sure that you have enough funds to meet unforeseen expenses, you can invest your hard-earned money. However, the size of the investment depends on your goals.
If you have short-term goals, you should invest in stocks, bonds and fixed deposits. There are various options on the market. Make sure you have calculated the risk involved in each type of investment.
If you have long-term goals, you should invest in real estate. Your wealth will go up as the value of the property increases.
It does not make a sense to invest money if you are under debt. Even if you have a small amount of debt, your top priority should be repaying it instead of investing that money. Debt quickly adds up because of late payment and interest penalties.
Benefits and drawbacks of savings and investment
Savings and investments have their own pros and cons. The following table will help you have a detailed understanding:
Pros and cons of saving
|The amount available in your account will not decrease.||Your purchasing power will continue to abate with each passing day.|
|You can reach your goal without being worried about losses.||You will need to rigorously save money to reach your goal compared to returns on your investment.|
Pros and cons of investing
|Returns are higher than your savings account.||You may lose your money.|
|Your purchasing power will align with inflation due to high returns.||You may take a long time to reach your financial goal if you do not get a good return on your investment.|
|You may not take a long time to reach your financial goal because of higher returns.||Your purchasing power may abate if your investment is a complete loss.|
Both saving and investing are paramount to maintain financial stability. If you want to build your investment portfolio, you need to start with saving money. If you save money, the money will save you. Make sure that you have paid off all your debts and have emergency funds to meet unexpected expenses.