20 Mar 2017

Should You Save or Invest?

Should You Save or Invest?

For every professional just getting started in his or her career, one of the earliest financial hurdles to clear is the savings versus investing argument. While it would be awesome if there were a silver bullet to this discussion, I can tell you firsthand that there isn't (sorry). You'll have to constantly balance the two strategies over the entire course of your career.

The reality is that the amount you save or invest is completely dependent on your life and career goals. With young professionals especially, this is becoming a lot less structured than previous generations.

For Baby Boomers and many in Generation X, the common plan was to work hard and consistently over 30 plus years while building enough of a nest egg to retire later in life. Millennials on the other hand are completely different, and the idea of early retirement, taking a year off from working, and a bigger focus on working for less money to preserve work–life balance are gaining a lot of ground.

There honestly isn't a right or wrong approach, but there are serious financial implications if a disciplined focus on investing and saving strategies isn't considered in advance.

What is saving?

Saving is the process of setting aside cash in accounts that are safe and allow you to easily access your money (also known as "liquid"). When you first start out, you'll want to make saving money the priority over investing by building a strong cash emergency fund. The reason is fairly simple—having cash on hand allows you to avoid taking on debt in an emergency situation, which can kill your ability to build wealth during your career.

The commonly recommended amount of cash to hold in an easily accessible savings account is three to six months of expenses. The idea is that you would be able to cover yourself in the event of an emergency or short-term period of unemployment.

Please understand—learning how to save is the foundation for everything else that you will do financially throughout your life. It doesn't matter how high your income is; a person who makes a million dollars a year and wastes it has just as much as someone who makes 75 thousand a year and wastes it.

After your emergency fund is set, a good rule of thumb is to continue to save 20% of your income. This will allow you to put funds toward investing and hitting goals like putting a down payment on your first house.

What is investing?

Investing is the process of using your money to achieve a profit. There are countless vehicles for investing (i.e., real estate, stocks, bonds, annuities), and they all have varying degrees of risk associated with them. The risk involved is one of the biggest reasons that investing should become a large part of your overall financial strategy only after you've mastered the ability to save money.

You'll want to use your saved capital outside of your emergency fund to start working for you through investing. The investment vehicle you choose is largely dictated by what you're the most interested in and the type of risk tolerance you possess.

Even though saving should be your first financial priority during your career, investing is arguably more important over time and is a key factor in building real wealth that will allow you to eventually retire.

Are you starting your own business or not?

I've been an employee before, and I'm currently a self-employed business owner. Each one has its benefits, but they also tend to dictate your long-term investing and saving strategies.

Any mental health professional who is considering starting his or her own business needs to know that the first year or so can be a scary period of time. The more cash you can have on hand, the better. Because a self-employed income isn't guaranteed, having an extensive emergency fund helps you sleep better at night and also allows you to make the best decisions for the direction of your business without having to take on excessive debt.

If you are employed through a normal job, you need to take advantage of any type of retirement plan that you are offered. If you were offered a 401k with a match, you'd be smart to contribute the maximum amount allowed (hint: it's essentially free money).

In some professional sectors like public education systems or government jobs, it's really important to assess the type of retirement plan that is offered to you and decide if it's sufficient enough. As a former teacher, I found that the retirement system I participated in through the district wouldn't be enough for me to retire the way I wanted to. It's important to find a way to supplement your retirement funds through a separate investment vehicle if needed.

Time is the most important asset you have

The answer to the original question of "Should you save or invest?" is honestly both, but you'll have to prioritize them differently over the course of your career. The common theme with each is that the more time you spend doing them, the better off you'll be financially down the road.

Take some time as early in your career as possible to define what you want out of your working years and especially what retirement truly means for you. Having a strong idea of what you want to do in life will help you guide your saving and investing goals in an organized and thoughtful manner.

Never forget that money is a tool to increase the quality of your life, and learning how to use it in a disciplined and systematic way early on will be a huge help to you in the future.

-- Bobby Hoyt is a former high school teacher who paid off $40,000 of student loan debt in a year and a half. He now runs the personal finance site MillennialMoneyMan.com full-time, and has been seen on CNBC, Forbes, Business Insider, Reuters, Marketwatch, and many other major publications.

The opinions and advice expressed in this article are those of the author and do not necessarily reflect those held by the American Psychology Association (APA).

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