For the average person, saving more and spending less is standard financial advice. Saving can be safer, and if you put your savings into the right account, it can gain interest and expand significantly over time. But is saving a better option than investing for your Nest Egg?
“While money doesn’t grow on trees, it can grow when you save and invest wisely,” says a report from the U.S. Securities and Exchange Commission (SEC). “Knowing how to secure your financial well-being is one of the most important things you’ll ever need in life. You don’t have to be a genius to do it. You just need to know a few basics, form a plan, and be ready to stick to it. No matter how much or little money you have, the important thing is to educate yourself about your opportunities.”
The advice from the SEC is invaluable if you’re looking to secure your finances via savvy financial directives. The rich don’t get there by hard work alone. They also know how to save and invest wisely.
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If you’re looking for the best way to make the most of your finances, study the following strategy as a guide.
Saving and Investing Differentiated
First, you have to grasp the substantive differences between investing and saving. In a way, saving can be considered an investment. You’ll build your financial reserve by setting it aside bit by bit.
You can put your money into an account and use it for things like holiday and vacation spending, or you can put it into a closed account where it will gain interest and potentially double its value.
Investing involves taking your money and trying to make it grow through the purchase of things that will increase in value. Stocks, real property, mutual funds, and similar items qualify as investments.
The biggest difference between the two is that you don’t spend anything when you’re saving, but merely put the money aside. In investing, you have to spend money to make more money.
Businesses often have to make choices between saving and investing. Organizations that save, concentrate on reducing costs. They might seek a more affordable printing service for their brochures, for example.
If they were investing, they would put more money into their brochures in the hope that this would lead to higher sales and greater value. Either option could be constructive for the business; which course it chooses depends on which tactic more closely matches the firm’s primary objective.
Nest Egg – Save First, Then Invest
A savvy investor will tell you that you should have a good nest egg built up for emergencies before you make any kind of investment. You never know whether your investment will succeed, and holding something in reserve is like having insurance when the going gets rough.
As a general rule, it’s wise to build savings that will cover all personal and living expenses (i.e., mortgage, loan payments, insurance, utility bills, food, clothing, etc.) for at least six months. Additional savings should be set aside if you’re looking to make a large purchase, such as a house or car.
Once that level of savings is in place, you can choose to continue saving, or start investing. This is the sharpest approach, whether you invest or decide to continue saving.
Nest Egg – Who Should Save
Some people simply prefer saving over investing. If you’re the kind of person who doesn’t like to take risks, and you’re okay with marginal profits rather than the possibility of larger sums of money in one go, savings is probably ideal for you.
A safe way to save and capitalize on your nest egg is to put the funds into a closed savings account that accrues interest over time. You can make an average of 5 percent compound interest on a high-yield savings account.
To put this in perspective, $10,000 in a 5 percent compound interest account will yield an extra $2,500 at the end of 5 years. According to David A. Schneider, CFP at Schneider Wealth Strategies in New York City, many people who save really do earn more than some investors over the long run.
“An average saver will do better than a great investor who doesn’t save,” Schneider told Bankrate. “Let’s say you are in the rare group that can outperform (the market by) 2 percentage points per year — few can do that. But you can’t accumulate as much as someone who was more of an average investor but saved in a disciplined and consistent way.”
Investing Is for Higher Dividends
Some people prefer to make money a little more quickly and they don’t mind undergoing some risk to do it. There are many different avenues for investing, and you’ll have to weigh multiple factors before you jump in.
Among the most popular investments are:
- Mutual funds
- Options and futures
- Precious metals
- Real estate
- An existing business
- Your own new business
- A combination of any of the above
Getting into investing is a complicated process, and you’d be wise to research and practice carefully before going after it in earnest. Never forget the risk that distinguishes this approach from saving: You could lose money just as easily and swiftly as you gain it.
A successful investment can lead to higher dividends that would support a college fund, retirement, vacation home, or anything else you have your mind set on. According to Investopedia, investing can be smarter than simply saving because you’re giving your money an extra opportunity to work for you:
“If you keep your money in your back pocket instead of investing it, your money doesn’t work for you and you will never have more money than what you save. By investing your money, you are getting your money to generate more money by earning interest on what you put away or by buying and selling assets that increase in value.”
Decide What’s Right for You
If you choose to invest, you have the opportunity to make much higher dividends, but the chance of loss is equally high. If you save, you’ll keep that money, but you might not make as much, and it may take longer to see the returns.
It all comes down to what’s right for your personality and finances. Discuss the matter with a financial expert, and weigh your personal goals and feelings before you make the decision.
Article by Larry Alton