Typically, whenever I receive a substantial sum of money or experience regular inflows, I am often faced with a familiar dilemma: “Should I save or invest my money?” Over time, I have honed an intelligent approach to this decision-making process. I have hoarded these insights but recently decided to share them.
Hold on! The decision on whether you should save or invest your money largely depends on your income, short and long term financial goals, ultimately, a lot of factors decide this.
There is a thin line between savings and investments, although many people get this wrong, because both saving and investing yield interests. As such, people save to earn interest rather than invest.
When you are done reading this article, you would get a clear direction on which way to go when it comes to handling your finances.
Should I Invest Everything I save?
These two action words, “invest” and “save,” are quite similar but different. I will differentiate these two words in a few words, and after that, we will unpack the essentials of this discourse.
- Invest: To invest means to have a long-term perspective over the performance of an asset or business and commit your funds for a certain period, with the likelihood of losing a part or the full amount of your committed funds.
- Save: To save means to set aside a certain percentage of your income, whether a lump sum or a regular flow over a specific time. Consequently, investing may come with more risk than saving.
Moving on, you must understand the reason why you invest per time and the reason why you save per time. There are different reasons why we save. - To Prioritize Our Spending Pattern: We save to prioritize our spending pattern. Since our desires are limitless, setting budgets would do a great job. However, savings are critical items under budgets. Through savings, we eliminate irrational spending to a large degree, as our focus would be skewed toward only justifiable needs and wants.
- To cater For Emergencies And Retirement: We save to cater for unforeseen contingencies and retirement. Sometimes, we experience certain events that demand immediate financial response. In events like this, our savings come in handy and can be utilized. Our savings help us to meet regular expenditures, which might not be necessarily huge, but recurring in nature. Lastly, we save to invest. Yes! This may sound tricky, but useful whenever anyone asks you the question, “Should I save or invest my money?”.
- To invest: While we save for other reasons, we also save for investment. The minimum amount of money to invest in a certain asset class or business may be huge, depending on the kind of investment.
Sometimes, the return on investment can only be material if the money invested is huge. For example, 11.5% on 1 million naira is different from 11.5% on 10 million naira.
In addition, some investment opportunities are seasonal, while others can be spontaneous. Therefore, saving our money serves as a preparatory phase ahead of an investment opportunity.
By now, you must have noticed that there are many reasons why we save, of which investment is one. This implies that you only invest your savings depending on your reasons for saving.
However, if, for any reason, the initial purpose of a particular savings was to plan for retirement, such savings could be partly invested because investment provides you with returns that regular savings would not give you.
In this case, your investment options should be narrowed towards low-risk investments. There are different kinds of investment, including stocks, bonds, real estate, mutual funds, and so on.
Before deciding on any investment, you need to estimate your risk appetite, possibly with the help of a wealth manager, investment professional or finance coach. In other words, the aim is to find out if you are comfortable losing your money in an investment that offers you a higher return.
In assessing your risk appetite, the finance coach would qualify the degree to which you can take up a risk. Typically, there are three categories of risk profile; conservative, moderate and aggressive. Also, the features of the investment will filter into your decision-making process.
For example, it may not be wise to invest all your savings in a property or real estate fund. This is because you would not be able to easily recall your funds, in addition to the high risk involved.
To emphasize, real estate investment is not liquid and should be carefully considered before investing. Is it a good idea to invest your money? We will find out in the next paragraph.
Is It A Good Idea To Invest Your Money?
People can be very inquisitive but I am here to always serve you with valuable insights to empower your financial journey. If you invest your last penny, you would have nothing to feed on and you may go broke.
That being said, “should I invest or save my money?” Well, I will share my thoughts with you but before I do, I would like to brief you with an analogy.
In farming, it takes the sacrifice of a seed or stem, time, and management to harvest the fruits of what has been planted. In similar fashion, the primary catalyst for wealth creation is investment.
The sacrifice does not only include your principal, but also investment in knowledge and time, similar to farming. Through the intelligent combination of knowledge, patience (time) and money, you would acquire a lot more than you would have if you decided to save your money.
Mind you, you are investing in yourself as you read this article. But, It could also be a good idea to invest your money because by investing, you would preserve the purchasing power of your money, in other words, you could prevent or reduce the pace at which your money loses its value over time, especially in a country with soaring prices of goods and services.
To simplify, money’s purchasing power means your money’s worth. So, the value of $5 in 2002 is different from that of $5 in 2024, which is 22 years apart.
This is the same for 10 years, 5 years and even 2 years. In fact, the value of money depletes daily, and a strategic way to preserve the value of your money is to invest.
On a final note, you invest your money to work for you. This is easily true for high-net-worth and ultra-high-net-worth individuals. For the mass affluent and people below this category, this may not be affirmative for a start, because it takes time to grow your wealth, of which saving and investing are ways through which you can grow your finances.
Money can work for you when you earn a stream of income. This could be a dividend-paying stock or a coupon-paying bond. It could also be a short-term fixed-income instrument.
Should I Save Or Invest In My 20s?
In your 20s, you are most likely in the early or mid phase of your career, perhaps, running your business. While the question, “Should I save or invest my money?” is common amongst young people, the response to this question is quite subjective as people in their 20s are living life at different phases.
The factors that contribute to these differences in phases include; family background, level of income, economic situation, differences in ambition and life choices, to mention a few. Notwithstanding, at this phase, you should be earning enough to save.
However, depending on the size of your income, you could also set aside a certain amount of money to invest. Nonetheless, as long as you can save, you can also save enough to invest later in future when the opportunity falls.
But remember, you have more time ahead. Therefore, your 20s are a great opportunity to do the needful – cultivating the habit of saving and investing in several asset classes.
The celebrated billionaire Warren Buffett started investing before he was 15 years old, as some reports documented, and he bought his first stock at 11.
That said, “Time” is crucial to everyone’s financial journey. Most importantly, while investing in your 20s is a good start, you are expected to understand the kind of investment you will be committing to for the next few years.
Therefore, I would like to specifically encourage you to study and research before deciding on which investment to venture into.
Should I Spend My Money Or Save It?
There are necessities that warrant spending, and there are bills that propel us to spend. So, let us begin with a wise nugget from Warren Buffett: “Do not save what is left after spending, but spend what is left after saving.”
It is unwise to completely spend your money. It is also unwise to completely save money because your needs and wants would not be attended to without money.
However, your desires cannot be totally satisfied. The consequence of this is that you would most likely have some financial needs and wants that cannot be addressed immediately. That said, you would need to spend part and save part.
Sometimes, we have pressing obligations that would demand us to spend rather than save. In this case, you should consider your priority and opportunity cost before spending.
In other words, you should consider your options before making your decision. If you have been saving for a while, you could spend a part for fun. But if you do not have savings or you just started saving, I would advise that you save.
Why Invest Rather Than Save? Is It Better To Save Or Invest?
Essentially, Investment may yield a higher return compared to the interest rate on your savings. While numerous investments can provide you with higher returns, the two key pros to this are “risk” and “liquidity”.
For example, a high-yielding short-term instrument like a commercial paper could offer you a befitting interest, but the company may default when the commercial paper matures.
Also, investments are generally less liquid compared to savings. This means that, whenever you are urgently in need of money, you may not easily access your money, unlike savings. An investment is liquid if you can easily recover your money even before the end of the life of the investment and with little or no impact on the value.
Since the interest earned on investment is higher than saving, you would be better off preserving the value of your money because money loses value every day.
Investments like treasury bills, money market instruments., commercial papers, bonds and equities could yield a lot more. However, these asset classes do not share the same level of liquidity.
For example, money market instruments are more liquid than treasury bills. Treasury bills are more liquid than bonds. For stocks, you should consider consulting an investment professional because of the risk involved in investing in stocks. There are two dimensions to investing in stocks and even bonds.
- One is receiving a dividend or coupon.
- The other is capital appreciation, that is, as the market price appreciates over a given timeframe, you can exit your position and ultimately increase your wealth.
To reiterate, investing in stocks can be highly risky and would need the advice of an investment professional.
Lastly, you are prone to lose your money to robbery if it is saved in your accounts alone.
In the event of a robbery, your investments in several asset classes could protect you from losing all your money, since the investment industry is well-regulated and procedures to opt-out from investments could take some time, unlike a swift withdrawal from your bank accounts.
If you are a Nigerian, you probably have heard of situations whereby, robbers demand for Bank Verification Number and pin, which is used immediately to withdraw your entire bank balance.
For stocks, bonds, treasury bills, exchange-traded funds, and money market instruments, robbers may not be able to access these investments, because they cannot be converted to cash for withdrawal instantly.
Here, it could be wise to have some money in liquid investments like the money market. By this, you hedge your money against likely robbery events, while earning more than what regular savings would yield.
Conclusion
Here are some key takeaways from this article:
- It is good to save and equally good to invest.
- The ratio of savings and investment to your income is only subject to your finances.
- You save for several justifiable reasons, including saving for investment purposes.
- You may also decide to spend, subject to your priority and saving habits.
- To build wealth, you invest rather than save only.
- If you are a risk taker, I would advise you to research and consult a personal finance expert, an investment professional or a financial market expert.
- There is no specific age that is too early to begin saving and possibly investing. You start as early as possible, and you start now if you haven’t.
