Even when you’re living on a limited budget, it’s always a good idea to set some money aside for future you. But even as you’re building your emergency fund, you may be wondering if your money would better serve you if you invest it. Whether you’re planning for a vacation next year or your retirement in thirty years, it’s always a challenge to know exactly where your money should go. Here’s what to know about choosing saving over investing, depending on your financial goals.
When to prioritize saving
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The temptation to choose investing over savings is a little like financial FOMO—especially when the average stock market return seems far more lucrative than a so-called “high-yield” savings account. (Business Insider does a good job highlighting this exact conundrum.) However, before you opt for stocks over savings, carefully consider your timeline for tapping into your funds.
Prioritize saving if you envision needing your money any time in the next five years. Maybe you’ve set your sights on a vacation or down payment on a house, or perhaps you need to pad out your emergency fund. (For reference: A “starter” emergency fund is around one month of rent plus your insurance deductible; From there, assuming you’ve paid off any high-interest debts, you should keep building an emergency fund that can cover you for six months or longer.)
It comes down to remembering that savings accounts are more accessible and pose a lower risk than investing. Sure, lower risk might sound like “lower reward,” but more importantly, it means you won’t lose money in savings (unless you count a possible loss due to inflation). Here’s our guide to choosing a high-yield savings account.
When to prioritize investing
If you already have a comfortable emergency fund, the dream is for your investment plan coincide with your savings plan. While savings accounts are the choice for a short-term vehicle, you can turn to investing to meet your long-term goals, like stocking money away for retirement or to pay for your kids’ college.
The key is not to choose investing over saving only due to short-term financial FOMO. For instance, if you’re tempted to redirect your savings into stocks because you are planning a big vacation in a few months and have a gut feeling the current quasi-recessionary market has bottomed out, it would be unwise to then put your money into growth stocks that are designed to be held for at least five years.
The bottom line
Even when interest rates on your savings account are low (and they are increasing now), it still doesn’t make sense to redirect that money into stocks if you plan on tapping into it any time in the next five years. Review your financial goals and don’t make the mistake of putting short-term funds into a long-term savings vehicle.