Frugal Living Investing

Pros & Cons of Saving vs Investing

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Saving vs Investing

Is it better to save or invest in this high interest rate environment?

With the Feds marking interest rates at 5.5% – a 22 year high – it’s become harder and harder to make your money go further.

With another hike possible, trying to determine where to invest your money is an important question.

Let’s take a look at some of the advantages and disadvantages of investing your money, versus those of saving.

Pros and Cons of Investing

It can feel overwhelming when you start thinking about investing. Should you invest in traditional assets like stocks, bonds, and cash? How about diving into alternative assets like real estate, hedge funds, or cryptocurrencies?

Despite all the questions you may have, it’s easy to dip your toes into the investing pool. And you don’t need the help of a professional financial advisor or an MBA to start investing your money.

There are a lot of great investment apps out there, and they all can help you along your investment journey. But what advantages does investing offer you?

Stocks, bonds, and cash are the main pillars of traditional investing. When you buy a stock in a company, you get partial ownership of it. When the company is profitable, you make money. when it falls on hard times, you lose money. 

Bonds provide a fixed-interest rate, guaranteeing you a return on your investment. You lend money, they use it to operate, and pay you back after an agreed upon time. Bonds are generally issued by the government or corporations, and despite offering less growth than stocks, the fact that you’ll get a return makes them a great way to help balance your investment portfolio.

Alternative assets include real estate, venture capital, foreign currency, even things like collectibles and insurance products. Alternative investments are an excellent complement to traditional assets, as they offer the opportunity for greater growth especially over the long-term.

If you invest your money, you stand the chance of growing your wealth significantly over time. With some smart management of your investments, diversifying your portfolio and patience, you can reap the benefits – and hopefully live off the dividends of your assets.

On the downside, investing your money is always a gamble. The market is constantly fluctuating, and there’s no such thing as a guaranteed bet. If you’re interested in investing, often you have to anticipate playing the long-game. At times, you’ll lose money, but the longer you remain in the game, the odds are more balanced in your favor.

Additionally, when you invest your money, there are other costs often associated with it. For instance, you might pay brokerage or management fees, and when you want to withdraw your money, you may face various charges. You might pay penalties as well if you withdraw money early.

Pros and Cons of Saving

If you are looking to build an emergency fund, or have ongoing expenses or debts that you need to look after, then saving could be a better option.

While your return on investment will be much lower with a savings account than with investments, the security that accompanies savings, and the ability to access your money when you need it, makes it an attractive alternative.

Regular savings accounts are helpful for short-term savings goals and emergency funds – instances where you know you’ll need to be able to access the money when you need it. With a regular savings account, though, you won’t get much interest on your investment.

Presently, the amount of interest you’ll receive on a savings account is around 0.07% – less than a tenth of one percent. So you’re not exactly looking at living off the dividends…

Another potential downside of traditional savings accounts are the fees that can come with them, and you may have a very limited number of free transactions, if any, before you have to start paying these fees.

You could put your money in a high-yield savings account, which tends to offer a higher interest rate. High-yield accounts can have APYs of around 0.5% – 2%, and that interest can add up over time.

These accounts also tend to offer fewer fees than traditional savings accounts, and don’t often require you to have a minimum balance.

Another benefit of a savings account is that your investment will be FDIC insured. This means that you have some additional protections, making sure you won’t lose all your investments in a worst-case scenario.

No matter what your savings goals, creating a budget and sticking with it will help to achieve your targets. Be sure you set realistic goals, and remember that no matter how you do it, the important thing is to save.

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Editorial Disclaimer: The editorial content on this page is not provided by any of the companies mentioned and has not been endorsed by any of these entities. Opinions expressed here are author's alone

The content of this website is for informational purposes only and does not represent investment advice, or an offer or solicitation to buy or sell any security, investment, or product. Investors are encouraged to do their own due diligence, and, if necessary, consult professional advising before making any investment decisions. Investing involves a high degree of risk, and financial losses may occur.

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Prior to joining Moneywise, James Battiston was a frequent contributor to Ratehub where he wrote extensively on mortgages, home and life insurance, and has broadened his expertise to include retirement. Additionally, he has written content for companies such as Applied Systems, Access Storage and Aphria Inc. He holds an honours BA from the University of Toronto and is a graduate of the Canadian Film Centre. He loves to spend his spare time with his family and drinking copious amounts of coffee.

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