Saving is the safer route because the dollar amount in your bank account won’t typically decrease unless you withdraw funds. Interest rates on savings accounts don’t allow your money to grow very quickly. Unfortunately, interest rates are often lower than the rate of inflation. This means your savings could lose purchasing power over time. It’s tempting to want to invest to receive higher returns and beat inflation.
Pros of saving
As long as you don’t make withdrawals, the amount you save in a savings account will not decrease over time. You will be able to meet your goal on time if you save rather than invest. Some objectives must be met regardless of whether investment prices are rising or falling.
Cons of savings
However, there are drawbacks to saving. The money you save will lose value each year due to inflation. Saving also means you’ll have to set aside more money each month than if you invested and got better returns. If you earn interest, it may help to mitigate the negative impact of inflation.
Pros of investing
Investing gives your money the potential to grow faster than it could in a savings account. If you have a long time until you need to meet your goal, your returns will compound. The benefit of higher compounding returns is you won’t have to invest as much each month.
Cons of investing
However, investing isn’t always a wise idea. The value of your investment could fall just as you need it. Defer your aim until you have more money saved or the value of your investments has increased.
Money Market accounts
Both Discover and CIT Bank have money market accounts that you might want to look into. Interest rates on money market accounts are often greater than on savings accounts. However, they may impose higher minimum balance requirements or limit the amount you can withdraw.
Robo-advisors
Betterment, Personal Capital, and Wealthfront are examples of Robo-advisors that allow you to invest with the help of an automated advisor. Instead of dealing with a human, the machine will construct a portfolio for you depending on your risk tolerance, objectives, and other criteria. Wealthfront allows you to create your personalised investing portfolio by choosing ETFs from a list of ETFs. Wealthfront takes care of the rest, from automatically rebalancing your portfolio to reinvesting your dividends after you’ve chosen your investments.
