Saving or Investing - How to Know What to Choose in 2023


Assume that you have some extra cash, and that you need to decide whether to save or invest it. Surprisingly, the answer does not depend on your financial situation. Nowadays, when you can invest via an app with no transaction fees and modest continuing expenditures, you don't need a huge, round sum (like $2,000) to get started.

This is significant because it boils down to risk. When you deposit funds into a savings account, you are assured to keep the amount you placed plus a modest amount of interest, and the funds are protected in the unusual case that your bank fails. Most importantly, you may spend the funds whenever you wish, without fear of incurring losses or incurring a tax charge.

However, in today's economic context, the interest on savings does not go very far. That is why so many individuals who have never invested before are thinking about doing so today. Even if interest rates rise, savings account interest rates continue to trail inflation, so the money you store in those accounts may not keep up in the long run. If inflation averages 2% each year, then one dollar now may only be worth 82 cents in ten years. If inflation remains high for an extended period of time, it may be worth even less.

Are You Ready to Put Money in Place for Maybe Longer Than 5 Years?

There are other things to consider when selecting where to invest your money for longer-term goals that you do not expect to attain within the next two years. Even the finest, high-yield savings accounts have a poor return when compared to investment accounts (and are often even less than the rate of inflation).

If the interest rate on a savings account is lower than the rate of inflation, the buying power of the funds in the account will erode over time. This implies that if inflation rises, it will cut into your already modest return on investment. You should now put your money into a low-risk investing plan.

Investing the funds in a diversified portfolio will often produce a higher average return than putting it in a savings account. You should be prepared for occasional balance changes and have an investing horizon longer than a couple of years.

Placing the capital in a well-diversified, low-cost investment portfolio may increase the chance of achieving the investment target. A more aggressive strategy to saving entails greater risk, but it is better for long-term goals when you already have an emergency fund in place.

Do You Have a Sufficient and Reliable Emergency Fund?

When selecting whether to save or invest your money, consider how much cash you have on hand in case of an emergency. Experts normally recommend conserving for the near term and then investing any remaining funds.

High-yield savings accounts are an excellent choice for this reason since they carry no risk, ensuring that your money is always available. When you invest, your money might go up or down based on the day-to-day fluctuations in the market, therefore there is a lot more risk.

What constitutes a “sufficient” emergency fund differs according to your job stability and income. Here are some suggestions for establishing the size of your fund:
Set aside +3 months of expenses for couples with two incomes and stable jobs.
Set aside +6 months of expenses for couples with two incomes but less stable employment, or if one member does not work.
Set aside +1 year of expenses for a single-income individual who is not financially stable.

Can I Withstand the Market’s Ups and Downs?

This final question is all about risk. If you believe you may need the money soon (within two to three years), avoid investing it due to the added risk you assume by placing your money in the market. Instead, place this money into a more secure savings account.

Put your money in the market for long-term goals that allow you to take on greater risk. Experts typically agree that you should be most active with long-term ambitions (more than ten years out), and then reduce the risk for short-term aims.

If the answer is clearly No for any of the above questions, then the best thing to do is to remain focused on saving.

If you responded "no" to any of the above three questions, you may not be ready to begin investing your money, so instead, concentrate on saving. Saving is essentially the first step toward investing since you are not prepared to take on the danger of placing your money in the market without it.

Use a high-yield savings account to ensure that you're getting the most return on your money, especially if you're using it as an emergency fund. Just make sure that it has no monthly fees, a low (or no) minimum balance requirement, and a greater interest rate (referred to as "annual percentage yield," or APY) than a typical savings or checking account. In the Richest Man in Babylon, George Clason mentions the secrets of investing.

This article is part of our
Business Coaching blog series. At Dataczar we talk to a lot of small businesses. We’ve found a few books that we keep recommending time and again. To better help our customers, we’ve added a Reading List for Small Businesses to our website. We encourage every small business owner to read and keep these timeless business books on their office shelf.