Saving vs. Investing: What to Keep in Mind
It was a problem we all had as kids when we found a dollar: Does it go into the piggy bank or get spent on something to enjoy into the future? The options change as we get older, but the same kinds of calculations and questions arise. As adults, we are told saving is good, but we need to invest. So, which is more important?
Financial wellness involves many moving parts – saving, investing, debt management, insurance, and more. Adjusting one impacts the others. That’s why it’s important to take them all into account collectively and fine tune them to your overall situation. When questioning whether to save or invest, here are some things to remember:
Short answer: Saving is more critical, but both are important
Investing is about building long-term wealth; saving is about security now and in the future. Investing means taking money out of your pocket today so it can work for you. But if investing means you can’t afford a car repair or week off work, then saving is more important because the time horizon is sooner. A good rule of thumb: Have six months of expenses in savings.
Check your mindset: “How will I” vs. “How can I”
When you think about expenses, are you asking yourself “How will I pay for this?” or “How can I pay for this?” If the question is whether you CAN afford something, you should probably be saving more. If you have enough resources to choose the best way to pay, you may have the cushion you need.
Ask yourself: What does saving mean to you?
Some people save to help cover expenses in emergencies. For others, saving means working toward a goal – a new house, car, or vacation. Both perspectives are useful, because the money is still accessible in an emergency – but don’t spend the “goal” savings if there isn’t enough left over to feel secure in the event of an emergency.
Saving can lead to investing: It’s not an either/or question
As you set money aside, your confidence will grow, as will your tolerance for risk. Consider utilizing tools that combine the advantages of saving plus investing. Health Saving Accounts (HSAs), for example, allow you to save cash for health needs and potentially invest unspent dollars after reaching savings thresholds.
Starting is the most important step
Whether saving or investing, the action is the same: Taking today’s money and putting it aside instead of spending it. It’s a simple process, but surprisingly hard to start. Get in the practice of setting money aside now. Once it becomes habit, you will be a better saver AND a better investor.
Whatever career, family, or life stage you are at, a holistic look at your financial wellness can help you meet your goals. Talk to an Alerus advisor to see how you can enhance (or begin) your saving, discuss investing, allocate investments to match your risk tolerance and life situation, and balance both saving and investing with the other facets of your financial life. Whether you have $1,000 extra per week or don’t think you have any, we are ready to help.