Money makes the world go ‘round, or so they say. That’s not the only thing it can do, though. It can grow and it can shrink. It can make your dreams come true and it can be a stressful nightmare. It can do a lot of things, if you know how best to use it.
The hard part is figuring what the “best way” to use it actually is.
Short-Term vs. Long-Term
Deciding whether to save or invest your money often comes down to simply knowing what your priorities are and what goals you want to pursue. Is your goal something short-term, like having enough money to enjoy a big vacation? Saving is probably your best bet. For more long-term goals, like retiring early, saving can help, but investing is really the only way to get there.
That said, the two aren’t mutually exclusive. For example, if you’re to become a first-time homeowner, saving can make following the steps to buy a house go much smoother, helping you to make a bigger down payment and reducing your mortgage. However, a property you own can itself double as a long-term investment if you make it a point to renovate and resell or rent it out in the future.
Pros & Cons of Saving
Both saving and investing have their own unique advantages and disadvantages. As stated earlier, determining which benefits are deal-makers and which shortcomings are deal-breakers depends heavily on what your goals and priorities are.
One of the reasons saving is good for short-term goals, for instance, is that it allows you to keep your finances liquid. That means you can access and use your financial resources as needed, without worrying about losses or penalties. Another advantage of saving is that there’s very little risk. The money you put in is the same you take out, with little deviation.
That lack of deviation, though, cuts both ways. You may not lose any money, but you won’t gain any either. The biggest drawback to saving is that there’s no way to significantly grow your finances by taking advantage of market trends.
Pros & Cons of Investing
It’s been said that patience is a virtue, and nowhere is that true than in the realm of investing. That’s why investments are generally the way to go if your goals are more long-term in nature. Investments don’t generally pay off overnight and, compared to saving, offer noticeably less liquidity, meaning you can’t easily cash out if you find yourself in a tight financial situation.
What makes all that waiting worthwhile? Compound interest. Good investments grow over time, increasing in value so that when you finally do liquidate them, the profit you reap is worth much more than the resources you originally put into them.
The key phrase above is “good investments.” Not all investments are good, and it’s often difficult or even impossible to predict which ones will return a profit and which ones won’t. The biggest issue with investing is market volatility. Educating yourself can help mitigate the danger, but there will always be risk.