While gardening, a question suddenly came to me: Are people saving their money right now or are they investing it?
These two actions perfectly make sense right now, due to the pandemic, because first, people need the funds to ride this crisis out. So, saving what little money they have in case the worst comes is a practical and sound financial move. Second, investing right now in the stock market could set you up for higher gains when the economy bounces back up.
So, the big question is: Should you save or invest right now?
TLDR; Here’s a video for your convenience!
I understand that many people hate talking about money. According to a Wells Fargo survey in 2018, 44% of Americans consider talking about money a more challenging topic than death or politics. It’s crazy that that’s the case since money is at the center of everything in life – school, marriage, kids, friends, your hobbies and passions, etc.
Filipinos, on the other hand, have neither a like or a dislike on the topic. We understand the sacrifice it takes to make money. But, we have a bad habit of putting things off at a later time and spending huge amounts of money on pasalubong or throwing parties and celebrations.
These bad money habits could damage our finances in the long-term. Financially struggling will hinder your ability to live happily. So, the best way to start fixing our bad money habits is to either save your money and create an emergency fund or start investing your extra cash in the stock market.
The answer to “Should I save or invest right now?” really depends on what matters to you – your goals, and your current circumstances.
Whatever your goals are, you need to factor in some sort of timeframe with it. Goals cannot be called goals if there are no timeframes associated with it. So before you answer the big question, you need to ask yourself these questions first to truly assess your current financial standing.
Ask These Questions First!
- Do you have an emergency fund worth 3 to 6 months of expenses?
Emergency fund, or Rainy Day fund, or just simply “savings that you should not touch in case of emergency”, or whatever you wanna call it is a fund that all financial advisors tell their clients to have. And it’s for a good reason. In case things don’t go the way you planned it, having this will help you survive financially.
I personally prefer to save 6 months of expenses because it’s a good amount of buffer time for me to replenish any income loss. I also like putting my emergency fund in an High-Yield Savings Account because it yields more than savings accounts from traditional banks.
If you do not have this setup already, then start saving for it.
- Do you need the money right now or later?
Liquidity is a big factor when it comes to your money, whether it’s during a crisis or not. Having the ability to take out your money anytime you want is key to deciding whether you should save right now or invest.
If you feel like you’re going to need money in the next 3 to 6 months, then it’s better to save right now. This way, you can take it out anytime you want and use it for necessities.
If you feel like you’re not gonna need the money anytime soon, then investing right now is your best bet.
- How much cash do you currently have?
Knowing how much you have left on your wallet or bank account should key in to your decision. Seeing extra money in your account has a calming effect. You feel less anxious about money when there is enough or an abundance of it.
In reality, you don’t need a lot of cash to start saving or investing. What really matters in this circumstance is when you start doing it. The sooner you save or invest, the more money you stack up long term.
If you’re running low on cash, save it and build that emergency fund. If not, invest the extra money. But only invest money that you are comfortable losing.
- What is your risk tolerance?
Risk tolerance is all about how much loss you can actually stomach. Saving and investing in the stock market requires different levels of risk tolerance.
You might think there aren’t any risks in saving your money, but there is.
The risk with saving money is its opportunity cost. Saving money in your bank only nets you a very small interest per year. Saving money traditionally, or putting cash and coins in your piggy bank, does not generate you more cash.
Investing, on the other hand, is riskier but has the potential for bigger rewards. Investing your extra money in the stock market can generate you 3%-8% in returns. But you also run the risk of having your stocks lose value, especially in today’s economic climate.
Assess your risk tolerance. If you are new to personal finance, then start saving and start learning about different ways you can use your money to generate more money.
If you’re new to investing, there are relatively safe investments you can start from. Look into mutual funds, index funds and exchange-traded funds because they are less risky than picking individual stocks.