The myth
Nobody gets rich from keeping money in a savings account alone, or so a lot of people say. Many believe that interest-bearing bank accounts bring lower earnings versus investment products.
This belief prompts some people to prioritize investing over saving. They do so in hopes of growing their money at a higher rate than a bank account can offer.
Risks of believing this myth
Saving is different from investing. They serve different purposes and involve different facilities. But you may need both when preparing for the future.
Emergencies can ruin your finances if you’re caught off-guard. That’s why it’s important to save money for unexpected events.
If you invest without an emergency fund, you may end up withdrawing from investments prematurely. Pulling your money out of investments too soon can lead to penalties.
Another thing to consider is the inherent risk involved in investing. The value of your investments may go up or down.
You might end up needing money when the market is down, forcing you to accept a loss if you withdraw. This can disrupt your investing strategy and lessen the time your money has to grow.
The reality
Savings provide a financial safety net. That’s why experts recommend keeping an emergency fund with 3 to 6 months of your living expenses in a safe and easily accessible account.
Although having an emergency fund is essential, putting too much money in it might not be ideal. Any extra money may be better off in an investment that can possibly maximize its earning potential.
Remember that rising inflation can reduce the value of money. A savings account alone might not help you keep pace with it.
You can turn your attention to investing once you have enough emergency savings to possibly beat the effects of inflation and reach for larger financial goals.
It’s also ideal to assess your emergency fund regularly to factor in the inflation rate. Other major life events – like marriage or moving to a new place – may also require you to adjust the fund’s amount.
The verdict: It depends.
Your financial situation should dictate whether saving or investing should come first. Rather than choosing one over the other, you should review your current needs and goals.
This could tell you where your money is needed most. If you’re only starting out your financial independence journey, then paying back any debt or saving up might be the priority.
Once you have ample financial cushion, investing may give you the boost you need to go further with your life goals. It also helps to save up for big purchases that you have planned for the near future.
