I read something interesting the other day from Tisa Silver at the Investing blog on Bizzia. The idea of saving vs. investing was looked at. In these tough economic times, saving is on the rise as people worry about their financial situations. Current issues in the stock market has made investing an object of fear for many. However, in both of these cases, the motivating factor is fear. It is, perhaps, not the best idea to make such decisions based on fear. Tisa offers this insight into how you should decide whether to save or invest:
What is the goal and how far into the future is the goal? How much risk are you willing to take in order to achieve the goal? What rate of return is necessary in order to achieve the goal?
If your goal is to build an emergency fund that provides you with liquid assets in case you need immediate access to them, then saving is a good idea. Build up your emergency fund. But remember that saving is a form of investment as well. You receive a return from the money you put in a savings account. So think about how you can increase your yield and get the most bang for your buck.
If your goals include building up a nest egg for a comfortable retirement, putting your kid through college or some other long-term financial goal that requires better returns, then investing can be a good choice. Over time, the stock market has always gained. (Although I suppose there’s a first for everything.) Individual stocks may not do well, but the overall market wins out. Which means that with a good strategy, you are likely to get adequate returns. It’s why I like index funds.
At any rate, it is important to throttle your fear in either case. If you are saving only because you’re are afraid of what could happen to you immediately, instead of as part of an overall plan for financial security and freedom, you will likely stop when the threat of recession recedes. And if you are afraid of investing because of the current downcycle, you may never get the returns you need to reach your long-term goals.
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