How to Decide if You Should Save or Invest More Money
We all need money to survive and to live comfortable. It is obvious we don’t have all the money we want and we need to learn to save and invest wisely. Everyone has short-term and long-term goals and the question “Should I save or invest more money” can’t be answered with a simple “yes” or “no”.
Everyone needs to save and to invest money to provide a secure future. Developing a financial plan is an important decision which can help you to decide how much you should save or invest. Your income doesn’t satisfy to pay all your bills at every moment of your life. You need to set some money aside for emergency, your retirement and you likely want money to buy a house, a car, a new television, taking a travel or some other life goals.
Here are some steps you need to take before you can decide to save or to invest more money:
*Determine your goals
Everyone has some expectations in life and wants to reach certain short-term and long-term goals. These goals may be different when you are 20 than you are 40 or close to the age of retirement. Your goals need to be attainable and you surely need an emergency fund because you never know what will happen in your life. It may happen you lose your job, victim of a car accident, become sick or any other reason which can cause a financial disaster if you didn’t take the necessary preventions to set enough money aside.
*Make a budget
A budget is your financial guide which can improve your quality of life. It reflects your expected income and expenses and you can cut your expenses to meet your savings and investing goals. It is important to save and invest monthly a fixed amount. It is helpful because you can interact when you are going too far in the wrong direction and have not enough money left to meet your savings and investment goals.
The decision how much you save and invest is up to you. If you know how much you need to save to reach your short term and long term goals, you can calculate how much you transfer monthly to your savings account. It is best you take an online savings account because the interest rate is higher. It is important you transfer also monthly in your retirement plans, for example 401 (k) or IRA’s for America or pension funds for Europe. You need to check which plans are available in your hometown.
*How to decide to save or to invest more money
It may happen you can set more money aside than you expected. You have now to decide if you should save more or if you should invest more. The purpose of investing is to reach higher returns than your savings account but there is no security you will succeed. Many people make the mistake to invest a high sum in stocks, bonds, mutual funds in one month. There is always a risk you buy on peak price and that you never will make profit. Systematic investment plans are often the best decision because you don’t buy always on peak price and make more profit on the long run.
It is also possible you inherited a high sum of money, you won the lottery or you received or earned more money than usual. The decision to save, invest or spend your money will be difficult. It is best you don’t spend all this money immediately because there are months when you have to pay higher bills, for example paying insurances, taxes and cases of emergency. Only you can decide what is best for you. Your age, risk tolerance and investment profile are important issues and may help you to take the right decision. It is often best to divide this money in savings and investments. You likely don’t need all this money within 10 years if you have received a high sum of money. It is recommended to transfer a higher sum for emergency, save more in your savings account and you best make a new investment plan. It is possible to invest monthly more in your systematic investment plans.
The financial climate is important to decide which options are best. Is there a recession, inflation or time with a fast growing economy? These factors are important to know if you should choose for stocks, bonds, mutual funds. You may never stop with your systematic investment plans in mutual funds if these are conform your investment profile and risk tolerance but revision is necessary. It is often also not recommended to pay off your loan of your house immediately because you will lose tax benefits.
In times when interest rates are high, you can consider to buy a bond. Bonds are considered to be safe investment instruments if you choose them wisely. Governments bonds and corporate bonds from solvable companies are often good choices and there is almost no risk you will lose your money. When the economy is growing fast; it is not unlikely you can find interest rates of 5% or even more. During a recession and when the economy is struggling you will likely find no bonds which can offer you a good return and you best save your money or buy only short term bonds. Be careful with high yield bonds; you can get higher rates but you have to do your homework.
Diversify certainly and best avoid these kinds of bonds during a recession. The currency of your bond is also important; you might buy bonds in emerging markets with interest rates of 12% or even more; for example Turkey and some other emerging markets, but the value of their currency can drop more than the interest rate you get.
The answer of the question “Should I save or invest more money” is individual. There is also an emotional effect. Some people may not feel good if they invest more because there is always risk of losing money and a savings account will offer you always interest. You only can decide what is best for you. It is better to limit your risk if you come closer to the age of retirement but you can also miss some good opportunities to increase your earnings.
Follow your heart, do research and you may find the best solution to maximize your earnings. Saving and investing money are two necessities in life to provide a secure future but you can go wrong if you incorporate too much risk. You also best don’t follow advice of friends, family members or even financial experts; it is your money and nobody can guarantee success with your investments. The only useful tip is to invest systematically and not more than you can afford.