Saving vs. Investing and Understanding the Risks
Investing is essential for building wealth and securing your financial future. Here are five key reasons why investing is important, why it often trumps simply saving, and how to balance the risks:
- Combat Inflation
Inflation Erosion: Inflation reduces the purchasing power of your money over time. By just saving, especially in low-interest accounts, your money’s value decreases in real terms. i.e. €1 today buys you a lot less now than it did 20 years ago.
Investment Growth: Investing in assets like stocks, bonds, or real estate typically offers returns that outpace inflation, preserving and growing your wealth.
- Higher Returns
Savings Interest: Savings accounts provide security but often yield minimal interest, usually below inflation rates.
Investment Potential: Investments historically offer higher returns in the long run. For example, stock markets have outperformed savings accounts over the long term, significantly growing your wealth. As always, with any investment, it’s important to keep in mind that returns are not guaranteed.
- Financial Goals
Long-Term Goals: Investing is essential for achieving long-term financial goals like retirement, buying a home, or funding education.
Compounding Benefits: Investments benefit from compound growth, where your returns generate their own returns, exponentially increasing your wealth over time.
- Risk Management
Diversification: Investing allows you to diversify your portfolio across various asset classes, balancing risk and return.
Savings Safety: While savings accounts are low-risk, they don’t typically offer the long-term growth potential required to keep up with inflation – this is a risk often forgotten i.e. the risk of your money losing value in real terms. Strategic investments can provide a balanced approach, reducing overall risk.
- Wealth Building
Active Wealth Growth: Investing actively grows your wealth, creating passive income streams and capital gains.
Saving Stagnation: Relying solely on saving limits your financial growth potential, making it challenging to build significant wealth over time.
The Vital Role of Savings
While investing is crucial for long-term financial growth, savings play a key role in your financial strategy:
- Emergency Fund: Savings are essential for covering unexpected expenses and emergencies that arise within the next 12 months. A robust emergency fund ensures you can handle financial surprises without disrupting your investments. Everyone should try to hold at least 3-6 months of net household expenses on deposit before considering investments.
- Immediate Expenses: Savings provide a safety net for immediate needs, such as medical expenses, car repairs, or short-term unemployment, ensuring you remain financially stable. We typically recommend holding approx. 1-2 months of household expenses in a demand deposit account in addition to your emergency fund.
- Financial Security: Good deposit-based savings accounts offer stability and peace of mind, forming a strong foundation in your overall financial portfolio. They ensure you have liquid assets available when needed most. Having this peace of mind allows you to trust the investment process. Even in times of market volatility where your investment may fall in value you won’t feel the need to withdraw and crystallise a loss if you have a robust emergency and day to day fund.
Balancing Saving and Investing
To maximize your financial health:
- Emergency Fund First: Ensure you have a strong emergency fund on deposit before diving into investments. This fund should cover at least 3-6 months of living expenses.
- Strategic Investing: Once your emergency fund is secure, invest in a diversified portfolio to combat inflation and achieve higher returns over the long term.
- Integrated Approach: Savings and investments together provide a balanced financial strategy, combining security with growth potential.
Conclusion
Savings and investing are both critical components of a sound financial plan. Savings offer security and liquidity for immediate and unforeseen needs, while investing drives long-term growth and wealth accumulation. By maintaining a strong emergency fund and strategically investing, you can build a robust and resilient financial future.
About MyWealthManagement
Established in 2008, MyWealthManagement Limited together with its sister company MyMortgages.ie have built a reputation for delivering bespoke wealth management and financial planning advice in Ireland.
Working from Dublin and Cork, we service clients throughout Ireland providing financial reviews and determining based on the individual and family needs, the best solutions for Life Insurance, Serious Illness Cover, Income Protection, Mortgage Protection, Pensions, Investment and Savings. Whether you are starting out, or making a step-change in your career or preparing for retirement, taking some time to consider your financial future and security is important. We can help you with the first step of reviewing your current plans and discuss any requirements you may have on portfolio management, insurance protection, asset allocation & security selection, previous employment buyout bonds, PRSA & personal pensions, Executive schemes & SSAPs, post retirement ARFs & AMRFs, succession & inheritance planning as well as an independent audit & review service.
Like to chat with Stephen about Investment and Savings options to suit your needs. Drop a line to: [email protected]