Should You Invest or Put Your Money Into an Online Savings Account?
Many people who are fortunate enough to have some extra money in the current economy are wondering what to do with it. As such, a lot of people want to make their money grow but don’t know where to start.
There are two main options to consider: savings and investments. Each path has pros and cons. In this guide, we’ll look at both strategies so you can decide which approach is right for you.
Saving vs. Investing Money
Saving and investing both offer ways to make your money grow. However, they achieve this outcome in very different ways.
When you save, you tuck away a lump sum of money, bit by bit each week or month. People often put their savings in dedicated financial accounts, such as high-interest savings accounts or retirement savings accounts like 401(k) plans or Roth IRAs.
On the other hand, when you invest, you purchase an asset that you believe will appreciate in value. Ideally, you can then sell it for a profit in the future.
What Are Good Places to Put Your Savings?
Common options for savings include:
- Traditional bank accounts
- High-interest savings accounts
- Certificates of Deposit (CDs)
- Money market accounts
- Tax-advantaged retirement plans
What Are Good Investment Vehicles?
Investors can purchase many different assets with the potential to grow in value. These assets are sometimes called investment vehicles. Popular investments include:
- Stocks and other securities that can be traded on market-based exchanges
- Real estate
- Money market funds
- Precious metals and other commodities
- Foreign currencies and cryptocurrencies
- Collectibles and artwork
Pros and Cons of Saving
When it comes to saving, it’s important to have a plan. Many savers begin by identifying a specific goal, such as saving enough for a major purchase or a down payment for a new home. Then they create a step-by-step plan for reaching that goal.
Savers who diligently follow their plans often have success. However, this requires a committed mindset. It’s easy to get distracted from your ultimate goal, as other financial opportunities and purchases are almost certain to come along in the meantime.
Despite these caveats, saving is a safe and proven way to boost your financial standing.
Pros of Saving:
- Your principal is protected and can’t be lost
- You can earn interest on your savings
- If you keep your savings in a standard bank account, you can access the funds for emergencies
Cons of Saving:
- Interest rates can be relatively low
- Some savings accounts have fees
Pros and Cons of Investing
Investing can be exciting. And some investments offer the potential to generate fantastic rates of return that can accelerate your wealth-building efforts. However, investing carries risk.
These risks vary from one investment vehicle to the next. But a general “golden rule” applies: the greater the potential risk, the higher the potential reward. Thus, riskier investments tend to offer the highest potential rates of return. And safer investments, on the other hand, generally deliver lesser returns.
Pros of Investing:
- Investing can be a way to benefit from general periods of economic growth
- Some investments provide passive income, which you can then reinvest to build wealth
- Many relatively conservative investments outpace the average rate of inflation
Cons of Investing:
- There’s a risk of losing the investment money
- Rates of return aren’t guaranteed
- Investment profits are often subject to capital gains taxes
- There can be emotional ups and downs
Which Approach Is Right for You?
The choice to save or invest is a personal one. In order to decide which approach to take, you need to consider your own level of risk tolerance. If you do decide to invest, seek out investment vehicles that match that risk tolerance. Experts generally recommend minimizing your exposure to high-risk investments, especially when you’re just starting out.
That said, there are some situations in which investing may be ideal:
- Your most meaningful financial goals are long-term (more than five years away)
- You want to build wealth more quickly
- You have a higher risk tolerance
Similarly, saving may be a better idea if:
- You anticipate a need to use your saved cash in the near-term future (five years or less)
- Your financial goals are short-term
- You are relatively risk-averse
The Bottom Line
Finally, remember that you can both save and invest. Choosing between the two is not an all-or-nothing proposition. Many people have achieved financial success using both strategies simultaneously. So, striking a balance is yet another alternative worth considering.
If you do choose to save, consider online financial institutions. Online banking tends to offer better interest rates and more advantageous terms than traditional banking. For this reason, online savings accounts are an intriguing option.