Should I Save or Invest?
Michael Baum, CFP® RICP®
Vice President & Associate Financial Advisor
When it comes to building wealth and financial security, one of the fundamental questions is whether to keep your money in savings or put it into investments. Both saving and investing have their advantages, and the ideal strategy often involves doing some of both. But how do you decide the right balance? Let's examine the key factors.
The Case for Saving
Saving money in a bank account provides unmatched safety and liquidity. The cash in a savings account or a certificate of deposit (CD) is guaranteed by the FDIC and quickly accessible for emergencies or short-term goals. This peace of mind can be invaluable.
Over time, however, the average interest rate on savings accounts is quite low - often under 0.25% annually based on historical data. While your principal is secure, the interest earned may fail to keep up with inflation, eroding your purchasing power.
The Case for Investing
Over longer time periods, investing has significantly outperformed simple savings vehicles. Despite volatility, the S&P 500 stock index has averaged annual returns of around 10% over multi-decade periods. Even looking at rolling 5-year periods, the average annualized stock market return is around 8-10%.
These higher returns from investments allow your money to grow and compound faster over time. A modest $10,000 investment earning 8% annually would be worth over $14,000 after just 5 years versus just $10,400 in a 0.25% savings account. The tradeoffs are that investments carry more risk in the short-term and require more knowledge and active portfolio management.
read more below
get started on living well
Subscribe to the Fearless Flyer
Get the financial tips and insights you need to fearlessly pursue your goals, plus access to subscriber-only benefits like our Tax Resource Center and more.
Finding the Right Balance
So, which is better - saving or investing? The truth is that an ideal financial plan incorporates elements of both strategies.
Savings provide security and ready cash for emergencies, irregular expenses, and short-term goals under 5 years away. An adequate cash reserve and "rainy day fund" is a fundamental building block.
But for longer time horizons like retirement that span decades, investing provides the potential for much higher returns to build real wealth. The greater growth from investments outweighs short-term volatility over these extended periods.
A smart approach is to first build an appropriate cash savings reserve of 3-6 month's expenses. Then, prioritize paying off all high-interest debt. With those bases covered, you can begin investing for the future through tax-advantaged accounts like 401(k)s and Roth IRAs.
The exact split depends on your age, goals, and risk tolerance. But doing both saving and investing in a balanced, disciplined way gives you the best of both worlds - security and liquidity from cash savings, plus tremendous growth potential from investing over the long run.
Ultimately, your unique financial situation will guide whether saving or investing should take priority. But making room for both in your overall plan is ideal for building lasting wealth and financial freedom.
Are you wondering if you should prioritize saving or investing for your financial future? Our team of advisors at Weiss, Hale & Zahansky Strategic Wealth Advisors can help you develop a personalized strategy to balance cash savings with invested assets. Through our strategic Plan Well, Invest Well, Live Well™ process, we'll analyze your goals, time horizon, and risk tolerance to determine the ideal mix of saving and investing tailored to your unique situation. Schedule a complimentary consultation on our website or call us at (860) 928-2341.
Authored by Vice President, Associate Financial Advisor, Michael Baum, CFP® RICP®. Securities and advisory services are offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084. 860-928-2341. www.whzwealth.com.
You & Your Money Podcast
Tune in for market updates and financial tips to help you Plan Well, Invest Well and Live Well.
WHZ on YouTube
Quick Tip videos designed to empower you to reach your financial life goals.