Lately, it seems like everyone is talking about investing. But if you’re not sure whether it’s time for you to start investing, or if you should focus on saving, the answer depends on your goals, risk tolerance, and financial situation. In this article, we’ll help you determine whether you should focus on building your saving or starting to invest. So no matter where you are in your financial journey, we’d like to help you prepare to reach your specific goals.
Before you determine if you should continue to focus on savings, or start investing, you need to understand your goals. Usually, you save for short-term goals. These goals may include things like saving for a large purchase like a car down payment, moving expenses, or building your emergency savings account.
You should continue saving if you:
- Would like ready access to your cash. A savings account gives you access to cash when you need it, but many savings accounts limit how often you can take money out.
- Prefer minimal risk. If you do not like the fluctuations that come along with investing, you can consider depositing your cash into a deposit account insured by the Federal Deposit Insurance Corporation (FDIC), which insures each depositor up to $250,000 per insured bank.
- Want to earn interest. You can earn interest by putting money in a savings account, but savings accounts generally earn a lower return than investments. There are many different types of savings accounts that offer varying interest rates based on term.
Even though saving money is important, it’s only one part of your financial picture. After covering these short-term financial goals and building your emergency savings fund with at least three to six months of living expenses, you may want to consider the potential advantages of investing.
Investing is an option if you have long-term financial goals. These goals may include important life events that may occur in the next 5-15 years. These goals include paying for a child’s education, preparing to purchase a home, or planning for retirement. In addition to these types of goals, investing can be an effective way to put your money to work and potentially build wealth.
You may want to consider investing if you:
- Are looking for greater growth potential. Smart investing may allow your money to outpace inflation and increase in value. You should keep in mind that investing always involves risk and does not guarantee a return. It possible to lose some or all of the funds invested.
- Don’t need access to your funds right away. When you invest your money, it can take a few more days to access your money compared to a savings account.
- Are interested in a diversified portfolio. Investing isn’t only about buying stocks. Different investments offer varying levels of potential return and market risk.
When starting the investment planning process, it will be important to discuss your specific goals, timeline, and tolerance for risk with your Financial Advisor to enable him or her to present suitable investment alternatives.
You should also do some research beforehand to learn about what types of investments you’d like to make. Here are some examples of different ways you may build your portfolio:
Stocks: A stock is a share of ownership in a company, which entitles the owner, or shareholder, to own part of the company’s assets and earnings. They’re considered a relatively risky investment because they can potentially lose all of their value. However, they can also potentially increase in value over time. While owning stocks may give you voting rights, and a higher potential return, they may also come with price swings which means your stocks could lose a substantial amount of value in a very short time.
Mutual Funds: Mutual funds help with diversification in your portfolio. Diversification is a strategy used to help manage risk by spreading your investments across different asset classes, industry sectors, and types of investments. While mutual funds are usually professionally managed and offer a level of convenience when it comes to redeeming your shares, they do not offer a guaranteed return and you don’t control which investments are included in a fund.
Mutual funds are subject to risks, including loss of principal. Investment returns may fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Diversification, as well as, Asset Allocation cannot eliminate the risk of fluctuating prices and uncertain returns, and they do not guarantee profit or protect against losses in declining markets.
Bonds: A bond is essentially a loan you give to a government or an institution. In exchange, the issuer of the bond agrees to pay you a pre-set, regular interest rate payment for a fixed amount of time. At the end of the term, the issuer (who borrowed the money) agrees to pay you back the bond’s par value (or face value). While bonds are considered less risky than stocks, investing risks vary depending on the type of bond you buy. Bonds can help add stability to your portfolio, potentially helping reduce fluctuations in the overall value of your portfolio, contribute to meeting your income needs, and prepare for future expenses or long-term goals such as college and retirement.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and/or principal. This risk is heightened in lower rated bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Exchange Traded Funds (ETFs): ETFs are securities that typically seek to track the market performance of an index, such as the S&P 500, the Dow Jones Industrial Average, or the Russell 2000. They are traded like individual stocks on a stock exchange, meaning the price can change throughout the day—unlike a mutual fund, which is priced only once a day after the market closes.
Exchange Traded Funds seek investment results that, before expenses, generally correspond to the price and yield of a particular index. There is no assurance that the price and yield performance of the index can be fully matched. Exchange Traded Funds are subject to risks similar to those of stocks. Investment returns may fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost.
Now that you understand the potential risks and benefits of investing and the types of investments you may make, you should also consider what type of investor you are. Before investing be sure understand your appetite for risk, consider how much guidance you’d like, and know your goals. Setting the right goals can go a long way when developing an investing plan. You may also prefer working with a Financial Advisor, investing on your own online, or something in between. If you would like help selecting the level of guidance and control you need, click here.
The Prepare to Prosper financial series will soon return. We’ll discuss more tips and strategies to help you achieve your goals and build your personal wealth.
This article has been created for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any planning or trading strategy. Investing involves risk including the possible loss of principal. Asset Allocation and Diversification cannot eliminate the risk of fluctuating prices and uncertain returns, and they do not guarantee profit or protect against losses in declining markets.
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