We’re all told we need to save money, but what if I told you to stop saving money? Yeah, you read that right.
But if you’re not saving money, what should you do with it? For financial freedom and wealth building, investing is the key.
Don’t just take my word for it — even though I’m a Certified Financial Planner. “Quit saving your money,” Grant Cardone said in a video he posted online. “That’s what my parents did. They saved money. They didn’t invest their money correctly. They didn’t take money [and] leverage it into real investments because they were terrified of losing their money.”
Even though this might sound counterproductive, let me explain why investing is better than saving.
The Problem with Just Saving
Don’t get me wrong. In general, saving money is seen as a good practice, but it may not be the best option in some cases. The following are some reasons why someone might choose not to save money.
- Low returns. A lot of savings accounts offer meager interest rates, often below inflation, so your money loses purchasing power over time. In fact, the national average APY on savings accounts is 0.47% as of January 16, 2024, according to the Federal Deposit Insurance Corp. (FDIC).
- Opportunity cost. Some people choose to invest their money in higher-risk but potentially higher-reward ventures such as stocks, real estate, or starting their own businesses instead of saving. These options come with greater risk, of course, but they could also result in significant financial growth.
- Debt prioritization. Someone with a lot of debt and a high-interest rate might prioritize paying that down over saving. In this case, the money saved on interest payments may outweigh any low savings returns.
- Emergency needs. If someone lacks a sufficient emergency fund, it may be unwise to prioritize saving over having readily available cash for unexpected expenses like car repairs or medical expenses. 56% of Americans cannot afford a $1,000 emergency. For that reason, saving alone might not be enough.
- Lifestyle priorities. Rather than saving for the future, some people choose to spend their money on experiences and enjoyment. Even though this is a personal decision, knowing the potential long-term effects is crucial.
- Missing the bigger picture. Investing teaches you how to grow your money while saving teaches you how to squirrel away money. With compounding interest, you learn how small investments can make significant gains over time.
Investing: The Key to Unlocking Your Financial Potential
Now that you know why I’m not a big fan of saving money, I will explain how investing can be a powerful tool for building wealth, protecting your future, and reaching your financial goals.
- Higher returns. Historically, stock market returns have outpaced inflation and savings account interest rates by over 10% per year.
- Compounded growth. You can let your money grow exponentially through compound interest if you invest early. The longer you invest, the bigger the snowball effect.
- Beat inflation. Over time, inflation erodes your money’s purchasing power. By investing, you can outpace inflation, preserving your money’s value and perhaps even increasing it.
- Passive income. Many investments can generate passive income, such as dividend-paying stocks or rental properties. As a result, you may have financial security and freedom.
- Financial freedom. If you’re hoping to retire early, start a business, or simply live comfortably, investing can help you achieve your financial goals.
Of course, there are risks associated with investing. Money can be lost on the markets, and they are always subject to fluctuation. However, these risks can be mitigated by doing proper research, diversifying, and keeping a long-term perspective.
Breaking the Barriers to Entry: Investing Made Easy
Many people find investing intimidating because they think they need a lot of money. However, that’s a myth. There are many ways to invest without a lot of money.
Put in place a safety net.
Creating a safety net should be your first saving goal if you live paycheck-to-paycheck. Creating an emergency fund can help you accomplish just that.
Ideally, emergency funds should be held in a highly secure account, such as a savings account, money market account, or a short-term certificate of deposit. An emergency fund isn’t for investing since investing involves risk, and that’s not the point.
To start, it’s important to accumulate enough cash in the account to cover your living expenses for 30 days. When that’s done, your next goal should be to add another 30 days of living expenses to your budget. If you’re a salaried employee, the account should have three to six months of living expenses. The account should have six to twelve months of expenses if you’re self-employed or paid by commission.
Also, it is a must to have a liquid stash of cash that you can access quickly in case of an emergency.
Small steps, big impact.
You can start investing as soon as you have built up an adequate emergency fund. As you know, investing is the process of using your money to earn more money. Also, to reach financial independence, you must expand your investment portfolio.
You should never stop saving money once you have built your emergency fund. Instead, focus on funding your investment accounts. With an emergency fund in place, that should be easier.
But what money is is still really tight. No problem. You don’t need thousands to get started.
Through platforms like Fundrise, you can invest as little as $10 in real estate properties. However, M1 Finance requires an initial investment of $100 for a standard brokerage account, crypto account, or joint brokerage account.
Overall, even $25 a month makes a significant difference over time. Keeping consistency is key.
Don’t let the market dictate your investment strategy.
As we can see in hindsight, investing at certain times has been better than at others. However, since no one knows what lies ahead, they cannot predict how the market will perform. As such, you should invest regardless of what the market is doing. When you invest periodically, you’ll be averaging the dollar cost into the market, mitigating the risk of losing money if the market declines.
If you think it’s a bad investment time, you can simply reduce your equities investments. While doing that, continue accumulating cash and fixed-income investments so you will be prepared to buy when the time is right.
Be sure to diversify your investments.
What is the best way to protect yourself against unexpected market surprises? You should diversify your investments across several asset classes.
A good investment plan includes stocks, fixed-income investments, peer-to-peer lending, cash, natural resources, and real estate. If any of those sectors crash, you won’t take a big hit, but you’ll also take advantage of any strong market, wherever it is.
Also, don’t go overboard with your investments. Index funds are a good choice for stocks because they have lower investment fees and generate fewer capital gains taxes. REITs, which are like real estate portfolios, are a good choice for real estate investments.
FAQs
What’s the main difference between saving and investing?
In both cases, money is set aside, but the goals and outcomes differ. When you save, you save your money for short-term needs, such as emergencies or upcoming expenses.
On the other hand, the goal of investing is to create wealth over the long run, putting your money in assets that can yield higher returns over time.
Why is investing considered “better” than saving?
Financial stability depends on saving, but saving falls short in a few key areas:
- Inflation. Over time, inflation reduces the purchasing power of cash. Compared to rising prices, savings accounts typically offer low-interest rates. You can preserve and even grow your wealth by investing in stocks and real estate, which historically have outpaced inflation.
- Growth potential. In comparison with other investment options, savings accounts yield significantly lower returns. You can achieve financial goals such as retirement or major purchases more quickly by investing your money.
- Compounding. Over the long run, compound interest allows you to benefit from exponential growth by reinvested returns earning interest.
Doesn’t investing involve more risk?
You can lose money when investing, as investments carry varying degrees of risk. This risk, however, can be mitigated by:
- Diversification. Investing across multiple asset classes and sectors makes you less likely to be exposed to any specific risk.
- Long-term horizon. While the market fluctuates in the short term, it has historically trended upward over time. You can weather market cycles and recover from dips if you invest for the long term.
- Research and understanding. Knowing your risk tolerance and investing according to your goals and resources can minimize unnecessary risks.
I’m new to investing. How can I start?
- Educate yourself. Learn about investing basics and different asset classes by reading books, articles, and blogs.
- Open an investment account. Look for a brokerage with low fees and features that are easy to use for beginners.
- Start small. When you gain confidence and knowledge, gradually increase your investments.
- Seek professional help. Talk to a financial advisor for personalized guidance based on your financial situation and goals.
Is it too late to start investing?
You can start investing at any time. However, starting early gives you more time to compound your money.
Image Credit: iam hogir; Pexels
