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Economic uncertainty has left many Americans confused about managing their finances.
On the one hand, the overall job market and the stock market are growing so far in 2023. On the other hand, things like height Inflation And interest rate Some are causing them to tighten their belts, and the risk of recession remains.
So, it’s not necessarily clear whether people should save more for a possible recession, or whether people should invest more if the stock market and other asset prices rise further.
While the answers may depend on your situation, there are some rules to consider when it comes to investing vs. saving. Following these savings tips and investment tips can help you decide what the best path forward looks like, even if the broader economic outlook remains unclear.
Start by exploring your investment options to determine how much you should invest now.
When should you focus on savings?
Saving money Might not be as exciting as investing, but having a base level of security is important.
In particular, consider building an emergency fund of roughly 3-6 months of living expenses, if not more. That way, if you lose your job or incur an unexpected expense, you can navigate that challenge without going into debt.
“A good rule of thumb for this reserve is to allocate one month of your average spending to a savings or checking account and two to five months to a money market account,” says Chris Maksimovich, a certified investment fiduciary and president of Global Wealth Advisors. .
Thus, you can take higher advantage of production Time to keep your savings liquid. However, making this cushion can take time. You don’t have to cut all your expenses immediately to get there, but you should probably save money consistently.
“Saving 20% of net income is a reasonable goal” for overall savings, says Autumn Campbell, Facet’s senior lead planner and certified financial planner (CFP). In addition to saving for your emergency fund, you can focus on paying off debt before investing, if applicable. While it may not feel like you’re saving money while managing debt, lowering your balance can finally free up cash that’s being sucked up by interest payments.
“If you have high-interest debt — say, 8% or more — consider paying it off aggressively with at least a portion of your savings,” says Campbell.
That said, some loans may be worth paying off gradually over time. If you have a low mortgage rate, for example, you can get a higher return by making the minimum payment and saving any extra money. High Yield Savings Account or investing in other assets for potentially higher returns.
Explore your high-yield savings account options here now to see how much interest you can earn on your savings.
When should you focus on investing?
Once you have a good handle on storage areas like buildings emergency fund And debt management, you can turn to investment.
“If your financial foundation is stable, investing can be a great way to work while you continue to save toward future goals,” says Campbell.
However, investing is not one-size-fits-all. Depending on what you are working towards, you can divide your investment into different areas.
“What type of investment account you use depends on your goals and timeline, such as a retirement account or retirement supplement for long-term goals, a health savings account for current and future health expenses, or a higher education fund, which can be financed. in a 529 account,” Campbell says.
Between these accounts, your assets may vary slightly.
“Specific investment options may vary depending on factors such as your time horizon, risk tolerance and investment knowledge, but diversified portfolios including stocks, bonds and real estate can be considered for long-term growth and wealth preservation,” says Holly Carey, a CFP. and VP, Senior Financial Planner at First Horizon Advisors.
Learn more about your investment options here now.
When should you save and invest at the same time?
In many cases, it makes sense to focus on both saving and investing, especially once you feel you have a good financial cushion.
For example, you can save for short-term goals, like planning a vacation this year, while investing money for long-term goals. like retirement.
“It’s important to strike a balance,” says Carey. “Remember, savings provide fundamental stability while investing offers long-term growth potential at higher returns, so it’s important to find the right mix that aligns with your priorities.”
Even if you’re in the early stages of saving, it’s possible that focusing on both saving and investing maximizes your benefits.
“In certain situations, it may make sense to send a small portion of your money to investments, even though the cash reserve goal has not yet been met. An example of this is if you might otherwise miss out on employer matching in a 401(k) or employee stock purchase plan,” says Maksimovich.
When should you focus on just one?
While many individuals are capable of both saving and investing, sometimes it makes more sense to focus solely on saving.
“To take a more conservative approach, don’t invest until you’ve reached your savings account goal. Having enough in an account for your emergency fund will provide peace of mind and investment confidence,” said Trustco Bank Administrative VP JR George.
In other words, if you don’t have a good savings base, it might make sense to focus on that area first. But if you have a good baseline, it might make sense to focus more on investing.
“Once you have a solid safety net, focus on investing to grow your wealth over the long term, taking into account your financial goals and risk tolerance,” Carey says.
Find the right method
Both saving and investing can be important parts of your overall financial success. While you may initially focus on one area, such as building a safety net of savings, in many cases individuals may get to a point where both become priorities.
The two areas can also overlap, such as how money is invested Certificate of Deposit (CD) accounts can be a form of savings that achieves higher investment returns than most Savings Account.
Ultimately, rather than viewing savings vs. investing as diametrically opposed, it’s important to look at these two activities holistically and find the right balance to support your financial goals.
Explore your savings options here now and start growing your money
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