Saving or investing, that’s the question. If you are going to invest, you do so because you want to gain future financial benefits. But when is it smarter to save? And why is investing different from saving? Long story short: When is it better to save your money instead of investing it? Let’s dive into it.
Saving or investing?
As you know, investing involves more risk than saving. In your savings account, your money is generally insured for up to 100,000 euros. If the bank goes bankrupt, you are always entitled to this money. The chances of a major bank going bankrupt are slim, but can happen. Assuming this doesn’t happen, your money is relatively safe in your savings account. Safe in the sense that it cannot suddenly decrease in value enormously and that you cannot just lose it.
This is also the case with investing – assuming you do it smartly. There is still more risk attached to investing. That’s because you’re letting your money do its work in an active market. The market is volatile and so your money can decrease or increase in value. If you are going to invest with a solid strategy, there is a chance that your money will increase in value considerably. That is of course the whole idea behind investing.
Return on investment
The advantage of investing compared to saving is that with investing you can achieve higher returns on your invested money. The value of your money therefore increases, while that does not happen with the current savings rates. The savings interest is almost 0% and that means that your money decreases in value if you leave it in your savings account. If you start investing with a good strategy and a well-diversified portfolio (more on this later), you can historically expect an 8% increase in the value of your assets per year.
Investing makes money
Investing your money is the only way to turn your money into more money. This is due to the so-called compound interest effect. In addition, you can also invest in products that can earn you a dividend or rent (with real estate for example) so you can generate a passive income stream with your investments. If it has come to the point that your investments provide a source of income, meaning that your investments can (partially) provide you with your livelihood. Money in your savings account, at the present time, cannot do that for you
Investing ensures faster growth of your wealth
Due to the compound interest effect, you initially need less capital invested to achieve a certain goal. The effect of compound interest helps you to increase your wealth faster.
When to save
However, we will not always advocate investing. We believe it is important to have a so-called ’emergency fund’: an amount of money saved you can survive on for a number of months, should you unexpectedly receive no income. In addition, a good buffer is important for financial resilience in the event of a setback. And a big savings fund just sleeps very well, because you know that you are free to make certain choices in the short term.
If you do not yet have a savings fund for at least 3 months of ‘expenses’ ( which you can exist on for at least 3 months). We recommend that, before you start investing, you first ensure that you have filled this up.. In addition, NEVER invest money that you cannot afford to lose. There is always a chance that the value of your investments will fall in the short term – simply because that’s what happens in the stock market, it is volatile, and the value of your investments can sometimes fall, sometimes rise, historically there is a very good chance that they will increase – and you don’t want this if you need the money in the short term for important life matters.
Saving or investing can be a hard choice. Investing is trading in uncertainty: you can never predict what the markets will do! So only invest with money that you can really afford to lose. Isn’t that the case with you yet? Gain knowledge, gain knowledge about the topic, hold your horses, and take your time.