Managing Money Save or Invest? It’s All About Balance

by Karen Gibbs | February 08, 2021

The start of a new year is the ideal time to review financial priorities, long-term plans and immediate needs for the year ahead.

How are you tracking toward long- and short-term goals? Are you taking advantage of ways to make your money work harder? What has shifted that you'll need to account for in the coming year? Taking charge of your financial plan starts with asking the right questions, and being clear about your goals.

And, when it comes to how you grow your money, that doesn't mean you have to make the “either or” choice of saving or investing. The reality is, both saving and investing are important for different long- and short-term goals. Following are tips to help discover a balanced mix of saving and investing that's right for you.

Saving essentials

When it comes to saving, the first goal that every saver should consider pursuing is an emergency fund.

“An emergency fund should have enough to cover four to six months of expenses,” suggests Nick Wilkins, managing partner and co-founder of Blueprint Wealth Advisors, LLC, in Chicago, IL. In order to determine that amount, you'll want to map out your finances by creating a budget, if you haven't already done so. With an emergency fund in the works and a clear idea of your budget, you can start setting saving goals. Keep these three things in mind as you do just that.

1. Invest in yourself

Be sure to include a fixed amount every month to build up your savings. Consider it an investment in yourself. (Hint: If you keep this money in an independent, specially labeled account, like “retirement,” you’ll be less tempted to tap into it for day-to-day expenses.)

Be sure to include a fixed amount every month to build up your savings.
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2.Put your savings to work

Instead of socking money away in a shoebox or a safety deposit box where inflation may potentially nibble away at its value, it’s wise to save in ways that earn interest. Consider vehicles like money market accounts, certificates of deposit (CD) and high-yield savings accounts. CDs typically have fixed rates over their term length, whereas money market rates can fluctuate over time. These types of bank accounts are federally insured, so your money is protected.

3. Explore a laddered approach

D. Randolph “Randy” Waesche, a financial professional and the president and CEO of Resource Management, LLC, in Metairie, LA, recommends building a savings plan that takes advantage of the best interest rates. When investing in CDs, ladder or stagger them with different maturities (say, 12, 18 and 24 months). That way your savings remain partially accessible;if the need for cash were to arise, and so you won’t be locked into lower-earning accounts should interest rates rise.

And, you don't need to settle on just one approach. Super savers leverage a combination of strategies to make the most of their money.

Investing basics

Investments like stocks and ETFs (exchange-traded funds) can grow in value at a pace well beyond that of savings accounts. But they also come with a greater risk since their value — influenced by market forces — can shrink, as well, leaving an investor with a possible loss of wealth. However, don't let investing myths stop you from moving forward with what could be a sound way for you to grow your money.

A range of investment accounts are available for various goals and life stages. For instance, tax-advantaged tools like 401(k)s and IRAs help people save and invest for retirement. And those with loved ones bound for higher education may use 529 plans to save up for the cost of college. Some types of securities, like municipal bonds, may also offer tax benefits to the investor. Meanwhile, a whole host of taxable investment options including stocks and bonds can be purchased individually or through vehicles like mutual funds.  

Here are four things to keep on your radar as you explore investing options that could help to expand your portfolio. 

1. Go DIY or with an advisor?

If DIY is your style, there are apps and tools available so you can self-manage your portfolio and make investments from your smartphone.

Or, if you'd like a personal CFO and financial coach, consult a financial advisor. Having an advisor to consult can help to offer peace of mind and a consistent approach — particularly amid market volatility. It helps to have expert guidance as you set long- and short-term goals and determine effective strategies to fund them.

2. Reap the benefits offered by retirement accounts

A 401(k) account is a priority when saving for retirement — not only because contributions to it are tax-deductible, but also because employers often match 401(k) contributions up to a certain amount. The key is to start early (the earlier you start, the more you’ll have) and max it out with regular contributions, says Wilkins. To avoid penalties and taxes, however, avoid withdrawing money from this account before age 59 1/2.

Individual retirement accounts — IRAs and Roth IRAs — are other long-term savings tools for retirement. They differ primarily in when taxes are paid. Contributions to IRAs are tax-deductible but earnings are taxable upon withdrawal. On the other hand, contributions to Roth IRAs are not tax-deductible, but earnings and withdrawals are tax-free when certain requirements are met.

3. Weigh your goals and appetite for risk together

After building a healthy emergency fund and topping up retirement-account contributions, other financial goals — such as a vacation home or a new car — may come into view. Wilkins suggests funding these by setting up a supplemental brokerage account with assets tailored to each goal. Then think about your willingness to take on risk. You may find you are comfortable holding investments known for rapid growth (say, a tech company’s stock) toward an aspirational “stretch” goal like a beach bungalow … while you also balance out your portfolio with assets designed to deliver more reliably steady gains (like index funds) so that you can afford future needs like a child’s car.

4. Think about how to account for market swings

Once your brokerage account is in place, consider funding it as one does a 401(k) — make it automatic. Through systematic investing, an investor makes consistent, repeating contributions toward their investment account, often acquiring shares in the same basket of investments. By virtue of dollar-cost-averaging, the investor buys more assets when prices are low and less when costs happen to be high.

Another potential hedge against short-term market fluctuations: focus on the long view. There are no assurances; markets will fluctuate and you may encounter money losses on paper. But Wilkins shares the historical perspective that, from 1926 to 2018, the S&P 500 index averaged an annual return of 10%. This leads many investors to care less about the bumps in the road in favor of what their strategy might accomplish in the long run.

Couple talking at home.

With this information in mind, you can better assess your goals, align those with your budget and then make your plan. And the pressure is off when it comes to choosing a strategy of saving vs. investing — it, like many things in life, is about finding the right balance for you.

Karen Gibbs

is a freelance journalist, regular contributor to and content creator for brands such as Procter & Gamble and Bed Bath & Beyond.