Saving and investing are two very different ways to earn a passive income; however, people find it difficult to decide which one is best for them.
These are both key to helping improve your wealth for the future. Additionally, the earlier you start investing and saving, the more money you will save. Let’s take a look at which one is best for you.
What is Saving?
First, we will look at saving which is something many people already do. It is where people will put money into a separate bank account, also known as a savings account. Each month, they will deposit a small portion of their wage into this savings account which will gradually increase through interest rates.
A savings account is great for emergencies as well. It is perfect for when any unexpected expenses occur that you cannot avoid. For example, your car might have broken down. There also could have been an emergency leak in your home.
It is great for helping you reach short-term goals such as saving for a holiday, not just for those emergencies. Plus, a savings account is low risk, ensuring your money is safe. However, because of this, the interest rates are not that high.
The Positives of a Savings Account
There are many positives to a savings account. Firstly, you are building a healthy emergency fund that gradually increases through interest rates. It can also help you save for short-term goals such as a new holiday, a new car, or a deposit for a house. The main positive to a savings account is that it is unlikely you will lose the money in your savings account because of FDIC or FSCS in the UK.
The Negatives of a Savings Account
There are a few negatives to a savings account as well. The first negative is that there are low-interest rates with these accounts. These interest rates can also be affected by inflation. The money you invest in a savings account could have been used in an investment account which would have returned a much higher interest rate. Nevertheless, the reason why people put their money away into a savings account is due to knowing that it is safe.
What is Investing?
Another method of passive income is investing. This is a more desirable option for those who wish to see large increases in five years. To do this, you would put money into stocks, bonds, and mutual funds. However, there is an issue with investing and that is the risk. However, the larger the risk, the bigger the reward. These returns are much larger than putting money into a savings account.
Investing is a great way to increase your bank account and put money away; however, you can also lose that money very quickly.
Another thing to remember is that the longer you invest in the stock market, the bigger the risk. It is because you have even more time to ride the ups and downs of the market.
A good example would be investing in Apple. Currently, it is the stock with the largest market capital. If you buy some shares in Apple, the value of your shares could increase over time. You can then sell those shares at a later date for you to profit. However, putting all your money in one basket (stock) isn’t the best idea.
You can never predict what will happen in the future. For example, Apple could go bust or run into financial problems. That could lead to the value of the stock plummeting and you losing your money.
The biggest negative to investing in the stock market is that your money isn’t safe. You don’t know when the market will benefit your investment and you don’t know when it may drop. However, if you make sure you invest in different stocks, you can make your investment strategy much safer.
The Positives of Investing
The reason why people invest in the stock market is because of the large returns that they bring. Furthermore, they can help you achieve your financial goals much quicker than a savings account. For example, putting money down for a deposit to a new home. Additionally, because you can diversify your investment account, it reduces the risk of losing a lot of money.
The Negatives of Investing
Despite the large returns, there is a risk of suffering from massive losses, especially in the short run. It also requires a lot of your time to research the market. You can’t start investing in a stock that you think would start to increase its share price. You must invest your money in valuable companies that will increase their share price.
The final negative of investing in the stock market is that it can fluctuate in value. That means it could take a long time to return to its original value, meaning you could wait a while to profit.
Choosing When to Invest and When to Save
Let’s say you have £200 left of your monthly wage and don’t know what to do with it. You could spend it on some new clothes or book flights for a city break. However, if you wish to be better with your money, you could put it in a savings account. You could also put it into an investment account if you wanted. However, deciding which to put your money in can be a tough decision to make. It depends on your current financial situation.
Investing is great to achieve your long-term goals. If you want to save for something more affordable, put money into a savings account. If you start young, investing may be the better option, as you have more years to recover those losses once you learned more about the stock market.
For the older generation, it is recommended that you move your stock investments into a bond or turn it into cash. Nevertheless, there are plenty of guides for how to start investing.
In Summary
Understanding the pros and cons of investing and a savings account is easy. Deciding which one would be best for you isn’t easy either. It all depends on your financial status.
If you wish to invest, ensure you do this with a regulated broker, and don’t invest with someone who has reached out to you. The reason why is that it could be a scam where you could lose all of your investment.