How to Prioritize Between Savings vs. Investing Goals

If you’re trying to set financial goals, one of the most immediate decisions you’ll probably be confronted with is deciding between savings vs. investing. There’s a lot of conflicting advice out there when it comes to how to prioritize your money. The truth is, you can do both saving and investing at the same time, but you’ll want to do so strategically so that you have your money available when you need it. 

Here are some scenarios to help you get an idea about whether to put your money in a savings or investment account.

1. Your emergency fund

When you first begin planning your finances you’ll want to prioritize saving an emergency fund that you can dip into when unexpected expenses arise. You’ll use this fund to cover costs  from being without work for a period of time to paying for emergency medical bills. Having an emergency fund saved means you won’t have to rely on credit cards in these critical moments.

Since you’ll need access to these funds on short notice, it’s smart to keep them in a savings account that you can withdraw from at any time without penalty. If you use a high-yield savings account, you’ll still accrue a small amount of interest on your deposit. However, the primary focus of these funds isn’t to earn money, but rather to have funds available whenever you need them. 

2. Immediate purchases

If you’re expecting to make a large purchase within a year, such as a car or a house, you might consider keeping the funds for this purchase available in your savings account. Having the money in a savings account means you’ll be able to access it without penalty whenever the right deal comes together. 

Also, investments with the largest returns are also often subject to market fluctuations. If you don’t have time to ride out the highs and lows of the market you might have to withdraw your money from an investment at a loss to make your intended purchase. Unless the investment is secure, such as a Certificate of Deposit, you’ll run this risk, which is why it’s not advised to invest money you plan to spend in the short term. 

3. Medium-term goals

Let’s say you plan on buying a house in the future, but don’t think you’ll make that purchase for the next three to five years, or even longer. Then you might consider investing the money you’ve already saved so that it can grow while you continue to save and shop for the perfect property. 

It could be hard to know where the line is between choosing savings vs. investing with these types of goals, but here are a couple of questions to help you decide:

• How specific is your timeline? Do you have a clear idea of when you will need the money or is that subject to change? For example, if you absolutely need to buy a house within three years, you probably won’t want to put the money for a down payment in a high-risk investment. If you’re buying a house in three years, but could also wait seven years if you had to, you can try for a higher rate of return on your investment, knowing that if the market dips you can afford to wait for it to recover.

• How aggressive do you need to be? Are you just looking for a place to park your money or do you need to actively earn more money with this investment to reach your financial goals? Knowing this helps you decide how much risk to build into your investment for medium-term goals.

4. Retirement

When it comes to saving for retirement you should definitely be taking advantage of all the investment opportunities to help you do so now. Since many people start planning for retirement decades in advance, this gives you a lot of time to earn compound interest and ride out the fluctuations of the market. 

Make sure to contribute to an employer-sponsored retirement savings plan, if available, as you work toward your savings goals and short-term investment goals. If you don’t have a retirement savings plan through your work, there are individual retirement products you can pursue such as an Individual Retirement Account (IRA). 

When deciding between savings vs. investing, retirement is definitely one area where you should always be investing. Your savings won’t earn interest at a comparable rate to many retirement products. 

5. Your child’s future

If you’re planning long-term for your child’s future school and deciding between savings vs. investing it could be helpful to seriously consider investments that help propel your finances beyond the interest it would earn in a savings account. 

For example, you could open a 529 savings plan to invest after-tax dollars. These funds are invested in stocks and bonds and can be withdrawn tax-free to pay for qualifying educational expenses. 

You could also consider Treasury Bonds for this purpose — which often have a lower rate of return but are considered secure investments. Or, you might consider a Coverdell Educational Savings Account, which can also be used to pay for secondary school educational expenses. 

Deciding whether it makes sense to prioritize savings or investing goals is a very personal choice. However, the coaches at The Gym can help you define and work toward these goals in a way that’s manageable for you. Learn how.