At LMM we bang the drum loudly in favor of investing over saving. But are there times when it’s better to just save? We’ll find out today.
We’ve gotten a lot of questions about when to invest and when to just save so we thought we would dedicate a whole show to the subject for you.
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One of the good things about Betterment, and why we encourage you to keep your emergency fund there is that there is no penalty for taking money out and you can have it quickly, within a few days.
But an emergency fund is for emergencies. If you’re constantly pulling money out, that’s a problem. If your time frame of needing to access money is less than a year, that money should be kept in a savings or checking account.
The Rule of 72 is a way to determine how long it will take to double your investment. With a 7% return rate, it will take about ten years to double your money.
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What do you need to buy soon? A car in two months, a house in two years? If you need the money in that time frame, you’re better off just saving it. Unless, you have some flexibility in that time line. The more fixed your time line, the greater the risk. Your hard date could be the day the market crashes.
If you have a big, non-monthly expense coming up, like paying for your semester, it’s not a good time to invest or even to pay down existing debt. Outside of this scenario, paying debt almost always comes first.
If you’re in a grey area, something low risk like Treasury Bonds are an option. There is no one answer. The decision to invest or save is based on your risk tolerance, your time frame, and a host of other factors.
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