Should I Save or Invest?

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This is such an interesting question! I saw it in a facebook group recently and I was inspired to write a post about it because I suspect that it is a question that a lot of people ask themselves.

 

I often see saving and investing used interchangeably- I’ve done it myself! We talk about “saving” for the future, but that’s not really what we’re doing when we put money into a pension for example.

 

And we’re certainly not investing when we buy a designer handbag or a new pair of louboutins……

 

So we need to first clean up the terminology, and then look at how both of these elements fit into the eco-system that is your money, because when your business starts to bring in more and more money, you will need to be utilising BOTH.

 

Terminology

Let’s look at the fundamental differences between these two entities:

Saving

This seems obvious, but saving money is about setting money aside for a future purpose. It is for money that will be used sooner rather than later.

The etymology of “save” is “to deliver from some danger; rescue from peril, bring to safety,” according to https://www.etymonline.com/. I like this, because I look at savings as a safety-net or cushion to save us from life’s problems. So an emergency fund would absolutely be in the savings category.

Investing

Investing money is also about setting money aside for a future purpose, but it is money that won’t be used for a LONG time (as in retirement).

The etymology of “invest” according to the same site is: “use money to produce profit”. This is distinct from “save” because it ISN’T money that will be used for emergencies – it is money that will pay your wages when you stop working. In order to reach a big sum of money, saving won’t be quick enough, investing however gets you there MUCH faster.

Saving

Why

So why would you need to save? For what purpose would you save? There is no point in saving for savings sake because that’s the quickest way to losing motivation, plus, your money is not performing it’s best if you have too much of it in cash.

Saving is for:

  • emergency funds – e.g. 3- 6 months worth of money that will support you if you can’t work
  • big purchases – e.g. weddings, cars
  • annual expenses – e.g. Christmas, birthdays, holidays, car insurance
Pros

There are plenty of pros to saving!

  • You have easy access to the money (as long as you put it into an easy access account)
  • Having money in cash is low risk compared to investing
  • You know where you are because you can see the total rising with time
Cons
  • You have easy access to the money (so there is temptation to keep taking from your savings)
  • Time weakens the strength of your cash – see this article that illustrates the point
  • The bank doesn’t pay much to look after your savings for you

Investing

Why

What’s the point of investing? Well if you want any chance of stopping work one day, then you need to invest. If you have a work-place pension, then perhaps for you that’s all you want to do. But if you’re building a business and plan to leave work one day, you’ll need a way to pick up where your work-place pension left off.

So investing is:

Pros
  • Better rates of return (but not guaranteed to be the same every year)
  • More likey to beat inflation over time even with stock market drops
  • Money making money babies- your investment money grows with COMPOUNDING!!
Cons

Final Thoughts

So should you save or invest? In my view, it’s both, because they both have a place in your money life. When building a profitable business that will pay your wages one day, there is no point scaling up more if you don’t have a decent handle on how you’re managing money in the first place.
If you’re going to invest, you must factor in emergency funds, paying off debt, protecting your money and enjoying yourself too.

It’s food for thought isn’t it?

Until next time,

 

 

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