Managing Money Save or Invest? To Build Wealth, Try a Balance — Here’s How.

by Karen Gibbs | April 24, 2023

If you’re evaluating your finances, you might wonder whether it’s wiser to hold onto your money or to invest it. But a better question may be: What’s the best way to do both?

That’s the key to building real wealth, according to finance pros, because if you focus only on saving for the near term, you could be short-changing your retirement — and if you invest in the future but never save money, you may find yourself underfunded when your mechanic tells you the rattle in your car wasn’t just a simple fix. For a more comprehensive approach to managing your money, try these expert tip.

Smarter saving

For financial peace of mind, your first savings goal should be a safety-net amount earmarked for unexpected expenses, according to Stacy Mastrolia, associate professor of accounting at Bucknell University in Lewisburg, PA.

“An emergency fund of three to six months of necessary expenses is a foundational saving priority,” she says, to help offset unplanned financial blows like illness or the loss of a job. Once you’ve secured that, you can move on to other saving and investing goals — and the strategies below can help.

Automate investments

The surest way to be successful with a task is to make it as easy as possible, which is why a “set it and forget it” approach is a great option to build up your savings.  All you have to do is arrange for your bank to automatically withdraw a fixed amount of money to go into your savings account monthly (or more often).

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An emergency fund of three to six months of necessary expenses is a foundational saving priority.
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Put your savings to work

If your funds are in a savings account earning next to nothing, that can be nearly as effective as stuffing your money under a mattress. Ideally your money should go where it will grow at a higher rate — either in a high-yield, interest-bearing savings account or into another financial vehicle like a money market account or certificate of deposit.

You’ll want to think through the pros and cons. For instance, CDs typically have fixed rates over their term length, whereas money market rates can fluctuate over time, so your earnings may be less predictable. People tend to like the predictability of a CD, knowing how much they’ll earn on interest, but the downside is they can’t access their funds before the term is up without paying a penalty.

Others like savings accounts because there’s often no minimum required to open one, and you can take the money out whenever you need. Money markets operate like both a savings account and a checking account, with high interest rates and the ability to write checks, along with the ability to sometimes make payments with a debit card (with restrictions on how often).

Explore a laddered approach

Staggering CDs or bonds can be a smart way to save more, suggests D. Randolph “Randy” Waesche, a financial professional and the president and CEO of Resource Management, LLC, in Metairie, LA, because it takes advantage of rising interest rates and can also help with cash flow.

Here’s how it works: Instead of investing, say, $10,000 into one CD that won’t mature for two years, you could take the same money and split it up into securities that will mature in 12, 18 and 24 months. This way, you wouldn’t have all your money tied up for two years. In one year, you could take the cash from the first CD or reinvest it, possibly landing a better interest rate, and six months later, you’d have another chance to do the same thing.

Optimized investing

Your financial goals should be different for investing versus saving, says Mastrolia, and it helps to keep some guidelines in mind. Generally, she says, if you want your money to be available within three to five years, you should save it — which could mean putting it in short-term investments such as CDs, for example. But if you can go longer without accessing the money, and you have faraway goals that need funding (like saving for retirement or your kids’ college funds), it’s a good idea to invest it, perhaps in stocks and exchange-traded funds or ETFs.

This is because, even though there’s always a risk when investing, “the market, on average, will provide a greater return,” Mastrolia says. “If an investor can leave the money in the market for at least three to five years, statistically speaking, they are likely to make money.” Here are questions to consider as you explore investing options.

Go with an advisor or DIY?

If you’d rather make financial decisions on your own, there are apps and tools you can use to manage your portfolio and make investments from your smartphone. The DIY approach is less expensive, but you miss out on guidance and the professional point of view that an experienced financial advisor can provide.

An advisor’s deeper understanding of the financial landscape and investing options can be particularly useful, especially if there’s market volatility. It’s the same principle as working with a real estate broker. Yes, you can sell a house on your own, but you may have a less stressful and more profitable experience working with a professional.

When's the ideal time to start saving for retirement?

It doesn’t pay to put it off – the earlier you start, the more you’ll have when you need it — and that means making your 401(k) account a priority, not only because contributions are tax-deductible, but also because employers often match 401(k) contributions up to a certain amount. 

Individual retirement accounts — IRAs and Roth IRAs — are other long-term savings retirement savings tools that are worth focusing on. 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.

If you’re deciding which to invest in, keep this in mind: With a Roth IRA, the tax break comes when you retire, since you’ll get tax-free withdrawals. That may sound great, and it is, but a traditional IRA’s annual tax breaks might help you save more money every year. That said, if you fear you won’t make shrewd financial decisions with the annual tax benefits, it may be best to go with a Roth IRA.

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What are your goals and appetite for risk?

Experts tend to recommend diversifying your financial portfolio and sticking with safer investments the closer you are to retirement. You can also minimize risk with systematic investing, a process that uses data, algorithms and proven policies designed to grow your financial portfolio.

If you have decades to go before this stage, generally you can take more chances for a potentially bigger return; the thinking is that, if your investments lose money, you’ll have time to try to recover it. Granted, markets will fluctuate and there are no assurances, but if you’re in a position to wait, you may be able to limit any losses to paper. As Mastrolia points out, “If you look at the S&P 500 as a proxy for the market return over the past 100 years, the average annual return was about 10%.”

Building real wealth can take some balanced thinking, but it’s worth weighing what you’re putting away for the future with your spending choices today to land on your ideal spending-and-saving mix.

 

— With additional reporting from Geoff Williams and Life and Money by Citi editors

Investing Savings Success Tips
Karen Gibbs

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

The content reflects the view of the author of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article.

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