Invest or Save in the Bank: Which is Better?
Whether you’re planning on saving your money for a down payment on a home or to take a vacation or buy a car, you do have options. You can put your money in a savings account or you can invest your funds. They both have their advantages but how can you decide which is best for you? Should you save or let your money grow by investing? Let’s take a closer look at the two before deciding on your own.
First, saving is the act of setting aside money each month after bills are paid where the funds can be located in an accessible, secured location. Most often this is simply a savings account. Your cash is deposited with a bank, securely, and you can access the cash if needed any time you want with a debit card or by visiting the bank. But before we get into the pros and cons of each, you first want to consider “cash reserves.”
Cash reserves, from a lender’s perspective, are an amount that is equal to a certain number of monthly mortgage payments. If a mortgage payment, including taxes and insurance, is $1,500 and the loan program you’re applying for asks for three months of reserves, that means $4,500 after the loan has closed and fully funded. However, from a practical standpoint, it’s advised that you keep at least six months of reserves in a savings account and not just six months of house payments but six months of living expenses. This is your safety net. Once this level is reached, then it’s time to talk about where the rest is going to go. But savings is not investing.
Investing is the act of purchasing an asset with the hopes of gaining a return on that investment. Asset classes include stocks, bonds, mutual funds and real estate. Certain investments carry a higher amount of risk than others. Investing is not like savings. You can make money by investing but you can also lose money. With a savings account, the goal isn’t about making money but preserving your cash. Bonds provide such security but they also provide the lowest returns. Stocks can provide the greatest return but also carry the highest risk. To spread this risk around while still providing a decent return, consider a mutual fund.
If you want to watch your money grow, then investing is your tool. But it’s not necessarily and all or nothing approach. You really should have both- savings and investments.
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