Americans have accumulated billions of dollars in savings since the coronavirus pandemic started. A combination of working from home and not being able to go anywhere allowed the public to save at levels never seen before. Once the U.S. economy fully reopens, what happens to this money?
Polls have revealed that many consumers are hesitant about touching this pile of cash. At the same time, it can be hard to refrain from going to your favorite restaurant, the local shopping mall, or concert after being cooped up inside for more than a year. But if you do choose to keep your hands on this hard-earned money, should you park it in a savings account or invest the funds?
The savings versus investing question is common for households, especially if they have come into a massive windfall or have put together a handsome sum of cash after a few years of working overtime.
So, savings versus investing: What’s right for you?
1. Know the Difference
What are some of the key differences between investing and saving? Here is how they compare based on the following features:
- Returns: A savings account will pay you an interest rate close to the federal reserve rate (which is close to zero), while the sky is the limit for your investments.
- Fees and Taxes: Savings accounts typically have lower fees and do not have significant tax implications as your returns are lower. With investments, as your returns can be higher, so can your capital gains tax obligations.
- Inflation: It is hard to keep up with inflation when interest rates for savings accounts are near-zero. But with the right portfolio, you can adopt an investment strategy that meets or exceeds the rate of inflation.
- Risk: Savings accounts have very little risk as they are insured by the government. However, should you adopt a high-risk investment strategy or if the financial market crashes, you could lose a large portion of your money.
- Volatility: Your rate of return on a savings account barely inches forward. But your money experiences plenty of changes on a daily basis if you invest your capital in the stock market.
2. Risk Tolerance
Estimates show that 55 percent of Americans invest in the stock market. So, what about the other 45 percent? They are sitting on the sidelines, and one of the reasons keeping them seated is fear.
Let’s be honest; many people, especially the young generation, have witnessed too many financial crises in their lifetime: the dot-com bubble burst, the Great Recession, and the coronavirus-induced collapse. Understandably, many young people are risk-averse.
Indeed, if you are too worried about losing your money, a high-interest savings account may be a good fit. But keep in mind that there is also plenty of low-risk, passive investment strategies worth exploring.
3. Financial Goals
Everyone has unique financial goals in life. Some want to save for their kid’s university tuition, even if it is only for a few semesters. Others might only have retirement living on their mind. All these life goals may require different money-building tactics.
Indeed, if you save for something critical like a house or an automobile, a savings account might be the best thing. On the other hand, if you want to retire at 62, investing may be the only reasonable option at your disposal since inflation and longer life expectancy require a greater nest egg. In short, investing is a smart money-growing option for your long-term goals.
4. How Much You Have or Earn
For risky investments, It is said that you should only invest what you can afford to lose.
This piece of wisdom is essential to remember before you hit the buy button for that meme stock.
If you live paycheck to paycheck, the last thing you should be focusing on is buying shares of a hot stock with your rent money.
That said, many financial products are available today that allow you to invest with pennies. This makes access to the stock market more available and affordable, no matter how little
you’re starting with. Whether it’s through a mobile platform that lets customers buy fractional shares, or an all-in-one checking and investment account that gives you daily returns, you can invest with any starting balance.
5. Money Knowledge
Let’s be honest: not everyone has the time nor interest to stay up-to-date on the latest developments in the stock market. You probably also lack the hours to research the various intricate mechanisms and terminology in the finance industry, like short squeezes, price-earnings ratio, and earnings per share. Life is busy.
Before getting involved in investing, even if you have someone else actively manage your investments, you should become acquainted with the most basic of terms. Your money is crucial, and you work hard for it, so do not go into something without possessing elementary knowledge. If not, you can always rely on a basic savings account to avoid many headaches.
In today’s environment, investing is imperative considering that most savings accounts offer very little returns amid historically low interest rates. But while investing might seem like the only way for most people, it may not be a reasonable option for specific individuals. Weigh your risk tolerance and your current financial situation to pick the right growth strategy for you. And take comfort in knowing that whichever option you choose, by prioritizing your financial future, you’re taking a step in the right direction towards getting your money to work harder for you.