What to do with extra cash will be different for everyone, depending on the number of working years you have left and how close you are to retirement, here are things to consider for saving versus investing.
The primary question in saving or investing comes down to this: Do you want to keep your money safe or do you want to grow it?
The next question that arises is: Is there a happy medium? That answer is “yes,” but it is going to depend on your age, number of working years left, and other factors.
The problem with saving is that interest-earning checking and accounts have a very low rate of return, historically, which has mostly been below the rate of inflation. This means that, over time, the money you are keeping safe in the bank loses purchasing power. By the time you start to spend (or need to spend), due to inflation, the money you have saved will buy you less than it did when you originally deposited it. In other words, because it has lost value, it’s equivalent to having lost money.
Due to the effect inflation has on savings over time, people make investments in order to at least offset the effect of inflation, but most often to make a gain on their money.
However, investing does come with a risk as stocks, real estate, gold, cryptocurrency all have their ups and downs and there are no guarantees.
Some people believe that keeping your money in savings alone is a risk, simply because you lose the opportunity of multiplying your wealth through slow and sustained growth, financial express reports.
There is a middle ground of savings and investing that will limit your risk.
The first is investing in government-backed items such as certificates of deposit (COD) or Treasury Bills (T-Bills). These are relatively safe investments that return a little better than the interest on checking and savings accounts. However, these can also be affected by the value of the dollar, inflation, and interest rates.
Another strategy, if you have the money and capacity for a little more risk, would be to divide your investments across a range of safe investments (COD/T-bills), stocks, mutual funds, etc. This way, you aren’t investing all your money into a single risk category.
Determining the best personal investment strategy, including how much you should keep in savings, depends on a number of factors, such as:
Example #1: If you are 40 years old, your retirement age is 67, meaning you have 27 more years to work. If you have no retirement savings, you have a decent amount of working years left, but you also need to make up for lost investment time. You might want a strategy that splits your money between risk and security, as you would probably want higher returns to make up for the years you weren’t building up retirement savings.
Example #2: If you are 30 years old, your retirement age is 67, meaning you have 37 more years to work. You have a lot of working years, which means you can take a higher risk with your investments. If an investment fails, you have plenty of working years to recover from your losses.
Example #3: If you are 60 years old, your retirement age is 67, meaning you only have 7 more years to work. You don’t have enough working years to recover from a bad investment, which might mean you want to limit your risk so that you don’t lose all your savings. However, on the other hand, you might want to risk a certain portion of your money (probably not all) on investments that can give you the highest return in the shortest amount of time. This will also be affected by how much retirement savings you already have or not.
*Disclaimer: The above examples are not financial advice, only hypothetical scenarios to demonstrate how investment strategies will differ with age and situation.