There are many reasons why the financial markets are front and center in 2022 (although for financial advisors and wealth management professionals, the markets are always top of mind). Businesses are recovering from unprecedented shutdowns. The remnants of the pandemic continue to challenge supply chains. We have a labor shortage. The government printed and distributed a lot of money to keep our economies afloat. Any single one of these occurrences would be enough to send waves through the financial markets. But all of them coming to bear within 2+ years may be a once-in-a-lifetime event for many of us. So, where does that leave us? Should we be saving? Should we be investing? Or both? Read on for key differences between saving and investing.
Saving as a Financial Strategy
We save money for three primary reasons: security, emergencies and large purchases. It’s wise to have several months’ worth of living expenses saved in the event of a medical emergency, loss of income or other events. People also save money for life events, including weddings, vacations, holiday gifts, and perhaps your child’s college education.
Most people save money in a savings account at a bank or at a credit union. There is very little risk to your money in a savings account. The government also ensures up to $250,000 per account in FDIC-insured banks. These accounts also offer minimal interest.
Other people save money in Certificates of Deposit (CDs) or money market accounts. While your money is typically safeguarded from risk in these accounts, they may not earn you much money in interest. Although, with the recent interest rate hikes imposed by the Federal Reserve and more rate hikes likely to come, you’ll be earning more in interest in the coming months than you likely were at this time last year. If your savings are in CDs, you may be penalized with fees for withdrawing from a CD before it has matured.
Another benefit of saving money is access to your funds. You can access your money immediately from traditional savings accounts at banks or credit unions. You will not pay a penalty for withdrawing your money. If your money is saved in a money market account it may take a few days.
Investing as a Financial Strategy
Investing is also a strategy for saving money but comes with various levels of increased risk as well as greater rewards. Unless you’re a day trader, investing is also a long-term strategy, and access to your funds in an emergency will not be immediate.
However, investing allows you to put your money to work for you to make more money, known as a return on investment or ROI. Investments can be made through a variety of financial vehicles. They may include workplace retirement plans such as 401ks. Investments may also include bonds, mutual funds and Individual Retirement Accounts (IRAs), which a financial advisor can help you to select and manage. Other options for investing include real estate.
Saving & Investing: How to Have Your Cake and Eat it Too
You don’t have to choose between saving or investing. No matter what you are earning,, prioritizing both saving and investing can provide the greatest benefits for achieving your financial objectives.
Start by earmarking money for your savings goals each time you get paid. Put that money away no matter what. Likewise, if your employer offers a 401(k) matching plan, take advantage of it as soon as it’s made available. Over time, as you earn more, increase your contributions to both.
If your employer doesn’t offer a matching plan, if you’re self-employed, or if you have additional streams of income, schedule an appointment with an experienced, reputable financial advisor to help you create an investment plan that aligns with your goals.
If you have $1 million or more in investable assets, please contact ICC Wealth Management for financial planning advice designed to help you develop a prudent, long-term strategy to grow and preserve your money.
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