Do you have money sitting around? Do you want money sitting around? What do you have to do to invest money, or should you save money rather than invest? Difficult questions? Absolutely, Let’s look at the pros and cons of Saving Money vs Investing.
When the cards are laid out it all depends on your goals and your risk tolerance. Are you trying to get money for retirement? Buy that new car? Different goals lead to a different strategy. There is also good and bad about each strategy too. Saving can be beneficial but it may also be less than effective in the long run depending on what your goals are.
Take a look at How To Properly Set A Goal and start succeeding at everything!
Generally, Saving is for the short term and Investing is for the long term. But they can be interchanged and there are benefits to both saving and investing let’s check them out.
Pros of Saving Money
Interest over time in Saving Accounts
One of the best benefits of saving money is that your money will still grow. Your money will accrue interest over time and if you save the interest and leave it in that account it will have a compounding effect and your money will start to grow faster and faster. By adding money every month or week or however often you can, you will be able to accelerate this growth even more and get bigger returns.
Funds are available all the time. In short, they are very liquid
When you have your money saved in a Bank Account your money is very liquid. Liquid meaning it is easily accessible and usable. By saving money you will be able to access your funds quickly. Whereas, if you have your money invested into a Property or Stocks you will need to either refinance or sell the Asset to have your money available. A Property is not a very liquid asset for this reason. Whereas Stocks are more liquid but can take up to a few days to get your money.
All Accounts are Insured up to $100,000 or $250 000
A lot of people don’t realize that your money is actually insured when it is in your Bank Accounts. Right now the CDIC (Canadian Deposit Insurance Corporation) insures all Chequing Accounts, Savings Accounts, Term Deposits of less than 5 years, Money Orders, Bank Drafts and Cheques up to $100,000. Also, the FDIC (Federal Deposit Insurance Corporation) insures all of these same accounts up to $250,000 in the USA. This protects your accounts from the potential of bank closure where you may lose all of your money in the associated bank accounts.
Easy and cheap to open and start
Opening a bank account is very easy. Today, you don’t even have to get off of the couch and you can have a Chequing and a Savings Account set up and ready to go. A lot of institutions are adopting a free Chequing and Saving Account model. This makes having these accounts cheap and easy to work with to make money.
Don’t need a lot of money to do it
There is no minimum requirement for a deposit into a Checking or Saving Account. If you have $10 or $1000 you can put any amount you have into your Accounts. With this type of liquidity, it makes saving very achievable for anyone who wishes to start. Simply take a little free cash and deposit it into your Checking or Saving Account and voila you are gaining interest on your deposit.
Automatic Bill Payments/Deposits
Another great option because these accounts are so liquid is, you can get up automatic withdrawals and deposits. This is great for saving because you can have a set amount of money going into or out of your account and you control when it happens. By setting up an automatic deposit into a Savings Account your money will grow and you don’t have to constantly be going to the Bank and transferring funds.
Simple saving is the best way to save. It doesn’t have to be complicated, it needs to be functional and offer you great rewards for your money being in the account. But, if there are good things there are also some negative things let’s take a look.
Cons of Saving Money
One of the biggest problems with Saving and Chequing accounts is that they do not pay very high interest. Right now some High-Interest Saving Accounts are only giving 2% interest per year. Now, this isn’t a horrible return on your money (ROI) but it isn’t a very good return either. If you have $1000 in that account after a year you will only gain $20 in interest.
Fees on Accounts
Having a Saving or Chequing Account may in some cases have fees. This may be a monthly fee, a yearly fee, an Overdraft fee, etc. Having fees on your Saving Account can really eat away at your returns. The whole point of saving money is to make more money for however long you are saving and be able to use it. If you are being charged $14 every month is can really diminish your Saving Account fast. We all know how good Banks are at taking our Money!
Limits on what you can spend daily
Most accounts have limitations to the amount of money that can be spent each day. This isn’t all bad though, this helps to protect your money as well. If someone ever got your banking information and tried to spend all of your money there would be a cap on the amount they would be able to spend every day. Some Saving Accounts are set up so that they cannot be used with a debit card. If you have an account set up this way you will have to transfer your money to a different account before being able to use it.
It’s only insured to $250,000
Now, this may seem silly to be a bad thing but there are a lot of people in the world with a lot more than $250,000. Or, what if someone received an inheritance from a deceased family member and wasn’t sure what to do with it. If it was in one of their Accounts it could be at risk if the Bank ever went bankrupt. This can happen which is why the CDIC and FDIC are insuring your Accounts.
Much easier to spend it when it’s sitting in an account
The old saying of “Out of sight out of mind” is a real thing. The temptation is there to spend money when we see it in our Accounts. It’s easy to convince yourself, “o I will only take a couple hundred and I will pay it back”. Most of us……. we never pay it back.
Inflation means you may be Losing Money
Right now the FED (Federal Reserve) works every year to try and keep a 2% inflation rate going. The FED has control over Interest Rates in the country. They raise the Prime Interest Rate when there is an influx of money going into the economy and lower the interest rates when the economy slows to encourage growth and spending. This, in turn, can have a negative effect on how much money you actually have in your accounts at the end of the year. If the inflation rate is 2% and you have $100 in your account not including any interest over the year the “value” of your $100 in 12 months will only be $98. Therefore, even though you still have $100 it is worth less a year from now.
Debt and saving don’t mix well
If you have any bad debt such as Credit Cards, Car Loans or perhaps Student Loans normally the interest rate for these loans will be higher than the interest you will make in your Saving Accounts. So if you plan on saving you should look at how much debt you have and consider doing something more proactive to reduce your debt at the same time or first.
Now that we have seen some of the pros and cons of saving money in your Bank Accounts let’s look at some pros of Investing your money.
Pros of Investing money
Typically a higher rate of return
Typically when you invest your money into an Asset such as Stocks, Property or even Mutual Funds you will get a higher Rate of Return than if your money was in a Savings Account. This is “typical” though. There is no guarantee of returns on your money and no guarantee of how much. This is where a personal risk assessment should be done. More risk normally has more reward or a higher ROI (Return On Investment) but carries more risk of loss.
Can be easy to start
Starting to invest can be very easy. You can make an appointment with an investment broker and start investing very shortly after your appointment. You can open your own investment portfolio and “get your hands dirty” by investing your money yourself. You can buy Bonds from a Bank right over the counter or purchase a Rental Property through a Real Estate Broker. There are thousands of ways to invest your money finding the right one for you is the key.
Set it and forget it
Some investments can have a “set it and forget it” mentality. If you go to an Investment Broker and sign up for automatic withdrawals, you can be investing every week, month, etc. The Broker will take care of the rest and every year or multiple times per year you will receive an assessment of how your money is doing and whether it is making money or not.
Especially when you are investing in Stocks or Real Estate you can get Compound Returns in the form of Dividends. With Stocks, Dividends are a certain amount of Money/Profit determined by the company that you have bought into that gets spread between all of the shareholders. If you set up a DRIP (Dividend Re-Investment Plan) your payments from the Stocks will be reinvested into the company giving you Compound Returns. In the case of Real Estate, you take your Cash Flow every month and invest it into other Assets or the property and can get Compound Returns.
Don’t need a large number of funds
You don’t need to have a large amount of money to start investing. You can get up an account with an Investment Broker and start investing for little money down if any. This makes it easy to start investing. Some apps can help save money and invest it for you. That means you can start investing while you sit on your couch watching TV.
Many, many ways of investing
There are thousands of ways to make money all it takes is knowledge and creativity. Don’t let what one person does stop you from exploring the many other ways that you can invest your time or money. Making money doesn’t have to be difficult but it will take some knowledge to achieve greater returns.
Some are very liquid
Some investments can still be very liquid. Stocks, for instance, are quite liquid in that, you can sell your Stocks very easily and take out your profit or stop and losses at you may have incurred. Normally it will take a little bit of time to get your money but it is a relatively short period.
Cons of Investing Money
You can lose everything fast
Especially if you take High-Risk Investments you always have the potential to lose money. In 2008 the Stock Market crashed and people lost millions and millions of dollars. Thousands of people lost their pensions. They were gone in the blink of an eye before they could do anything about it. Understanding the risks involved with investing is the best defense against losing your money.
Many parts of investing can get very complicate and executing some of the strategies for investing can get even very involved. Whether it’s using options in the Stock Market or setting up a Multi-family residential property, your knowledge is your limitation. The more you learn the easier it is to know how to invest and make money.
Investing doesn’t just have risk it can have a very deep emotional response as well. If you invest a lot of money into something and lose $100,000 there will most likely be depressing emotions involved. On the other hand, if you make $100,000 you will be very happy. There are good and bad emotions in investing in any area.
Some investments have a large time commitment. If you are investing in Small Businesses to get a higher return there is usually going to be a bigger time commitment than if you invest in Stocks. If you are investing in Rental Properties you will have to spend more time working with the Property, Lawyers, Tenants, etc. Time is money and if you want higher returns, be prepared to spend more time the higher you want your returns to be.
You may not be a Professional they have more time and experience
Jumping out of bed one morning and saying I’m going to buy an Apartment Building may not be the best idea. There is a lot involved in investing in Properties. There is also a lot involved in investing in the Stock Market. You don’t have to be a Professional to invest but you should have a competent knowledge of what you are investing in and how to hopefully lower your risk involved in whatever investment you choose. People go to school and get degrees in investing and make a career out of it. We can’t all do that but we can all learn what the best investment strategy is for ourselves.
It’s super easy to be influenced into making a bad decision with your investments. Advertising is all around us. Word of mouth is just as bad, “invest in this, it’s supposed to go up 20%.” Making your own decision on what to do with your money should always be a priority. Even if that decision is to go to an investment broker and get some help. That can be the best decision in itself if you need help. Remember you are not alone. People build careers around helping others learn to invest.
Where do you put your money? Why do you need to put it here and not there? These can be very hard questions to answer. Knowledge is the key to answer both. Whether it’s your knowledge or someone else’s knowledge, knowledge is still the key. The best investment you can ever make will ALWAYS be in your own personal knowledge. Learning where to place your Assets starts with Financial Education.
Financial Education will always be the number one investment. Investing in your own Financial Education will always have the highest rate of return for both time and money invested. If you spend $1000 learning how to invest properly you will get exponentially more returns than if you just plunk 1000 dollars into a random Stock you heard maybe a good deal.
Learning and understanding why it is or isn’t a good deal take Financial Education. The ability to asses a given situation and know if it is worthwhile pursuing. If you don’t have the Financial Education to invest properly or know what the real risks are you should take time to learn or get help in your pursuits.
Investing doesn’t have to be difficult but it does have to profitable. Why invest to lose money? No one wants that.
No matter what level of investor you are, start with Financial Education.
The education they don’t teach in schools. Whether you save money or invest money the end results are hopefully the same. We all want to make more money, let’s all teach each other how to do it and help each other so we can all benefit from a solid Financial Education.
Start by sharing and spreading the pros and cons of saving vs. Investing.