Deciding what to do with our money is an often tricky minefield, particularly when we are not well-versed at handling our finances. We discuss the important points that will help you decide if saving or investing is the best course of action for you, depending on your personal situation and financial goals.
The difference between saving and investing
Saving our money means putting some of it aside, with the aim of accumulating it to spend on something specific, like a deposit on a house, a big holiday, or for everyday emergencies, such as broken washing machines. This normally means you’ll be putting your money into a saving account, where it won’t be at risk and you can earn interest on it.
Investing, on the other hand, is where you use your money to try to make a profit, by putting it into things that you think will increase in value. There are plenty of places to invest, such as stocks, shares, funds, property, art or gold.
Unlike saving, investing involves risk,since there is never any guarantee that you’ll get your initial investment back, nor make a financial profit. That being said, you can certainly grow your wealth by choosing the right investments and being sensible, by setting a practical risk appetite and diversifying your assets.
Saving is vital
Everyone should be trying their best to save at least some of their money each month towards an emergency fund – that is, a separate account which is specifically set aside for unforeseen situations that would require swift access to finances, like the loss of a job or a major home repair. As a general rule of thumb, you should have three months’ worth of living expenses in the emergency fund. That way, you’ll always have some financial security in the case of a sudden event.
Once you’ve sorted your emergency fund, you should aim to save around 10% of your income each month, if you can afford to.Having a personal budget planner will really help you to sensibly manage your finances and you can easily see where to make spending cuts after your essential outgoings are budgeted for.
The only time where it would not be appropriate to save is where there are very important things that require money first-and-foremost, like paying off debts.
Only invest when you’re ready
With regards to investing, the key point to make is that you should only do so when you are financially stable and have all your major debts under control. Next, you should set a realistic risk appetite,which will help you determine the risk you are willing to tolerate as an investor. This is essential, as all investments are risky, and means you are less likely to bite off more than you can chew, particularly as a beginner investor.
If you are unsure of where to start, a financial advisor or independent investment research company can help you decide where to invest.
Above all, saving money should be your key priority before investing, simply because it is your savings that will give you the initial wealth you need to kick-start your investment portfolio. As such, only after you’ve covered all your essential expenses, as well as anything big you need to plan for, like a house or wedding, would it be wise to consider investing.