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Investing vs. Saving: A Comprehensive Guide

If you’re just getting started with investing, you may be wondering how much of your income you should allocate. Many experts suggest investing 10% to 20% of your income, but the exact amount depends on various factors. Fortunately, you can start investing with as little as $1 on some platforms. The key to successful investing is regular contributions, allowing you to benefit from more time in the market.

Investing vs. Saving

While both investing and saving involve setting money aside for the future, they serve different purposes and come with varying levels of risk. Understanding when to save and when to invest is crucial for determining how much of your income to allocate to each.

Saving typically involves placing money in low-risk accounts like high-yield savings accounts or certificates of deposit (CDs) at federally insured banks or credit unions. These accounts offer easy access to your funds and protect against losses, though they generally provide lower returns.

Investing, on the other hand, involves purchasing assets such as stocks, bonds, and mutual funds with the hope of earning a profit over time. While investments have the potential for higher returns, they also come with a higher risk of losing money. The level of risk varies depending on the type of investment.

Both saving and investing are essential components of a solid financial foundation. Some financial experts recommend saving 5% and investing 15% of your income to balance the two.

Short-Term Savings Goals

For short-term goals or needs, consider saving money in an account where you can access it quickly. If you anticipate needing funds within the next five to seven years, a savings account or other safe, interest-bearing account is often the best choice. You might save for:

• Emergency fund
• Down payment on a home or car
• Wedding
• Vacation
• Upcoming expenses

Long-Term Investment Goals

Invest money you don’t expect to need for several years to allow your investments to grow significantly through compound interest and to weather market fluctuations. Long-term investments can be used for:

• Retirement
• College education for your child
• Wealth building
• Protection against inflation
• Tax savings

How Much Should You Invest?

While aiming to invest 15% of your income is a good target, it may not be feasible for everyone. The amount you can afford to invest may change over time based on your financial situation. Before investing a significant portion of your income, ensure you have a solid financial foundation. This includes having an emergency fund with three to six months of living expenses and paying down high-interest debt.

To determine how much you can invest, examine your cash flow. Start with your monthly income, subtract your expenses and savings, and see how much is left. This is your potential investment amount. If you can afford to invest more than 15%, do so. The more you invest, the greater your potential gains.

Don’t delay investing if you have less than 15% of your income available. Invest what you can afford and look for ways to reduce expenses to free up more money for investing. Consider investing windfalls like tax refunds, commissions, or bonuses to boost your portfolio.

How to Start Investing

Once you’ve determined how much to invest, the next step is to get started. Here are some options:

401(k)

If your employer offers a 401(k) plan, it’s one of the easiest ways to start investing. You can invest pretax dollars, reducing your taxable income and deferring taxes on contributions and earnings until retirement. Contributions are automatically deducted from your earnings and invested in assets you choose from the plan’s offerings. Take advantage of any employer match, as it’s essentially free money for your retirement.

IRA

If you don’t have access to a 401(k), consider an individual retirement account (IRA). IRAs offer tax advantages to help you save for retirement. With a traditional IRA, you contribute pretax earnings and defer taxes until withdrawal. A Roth IRA allows you to invest after-tax dollars and make tax-free withdrawals in retirement, provided the account has been open for at least five years. Contribution limits vary based on age, filing status, income, and IRA type.

Robo-Advisor

If you’ve maxed out your 401(k) or IRA contributions or want an option that won’t penalize early withdrawals, consider a robo-advisor. These online platforms create personalized investment plans based on your time horizon, risk tolerance, and return estimates. While some platforms charge fees, they’re generally less expensive than working with a broker. Compare apps to find the best option for you.

Financial Advisor or Stockbroker

If you prefer to discuss your investment plan with a person and have them manage your portfolio, consider working with a financial advisor or stockbroker. This option is more expensive but can be beneficial depending on your investment amount and the level of assistance you need.

All investments carry the risk of losing some or all of your money. Consider your risk tolerance when choosing investments and determining how much to invest in each.

The Bottom Line

Investing 15% of your income is a good rule of thumb for meeting long-term goals. Even if you can’t afford to invest that much now, start with what you can. Your investment amount may fluctuate as your cash flow changes, but consistency can pay off in the long run.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you make informed financial decisions and achieve your investment goals.

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