What money should I invest? Is it right to use all your savings to invest? Or is it better to put them on a cash deposit? Investing can be a great way to increase your money, but it’s not for everyone. Whether or not it depends on your goals, specifically if they are long, short, or medium term.
We have long discussed about how to invest money and where to invest them by choosing the right asset to focus on.
Before that choice there is to consider one very important thing: money. It seems obvious, but what are the money to invest? Do they come from savings unspent? It is right to use all the savings for investing? In order to not loose them in case of a loss is it better to save money in an ultra-safe place like a bank savings account?
Let’s try to answer to these questions in order to help you decide how much and where to put your money in order to create a financial security without taking too much risk.
First we have to distinguish two terms which tend to be confused: saving and investment.
Saving is putting money aside, bit by bit, without exposing it to any or little risk. People usually saves up to pay for something specific, putting money into cash products, such as a savings account in a bank or building society.
Investing is committing money to an account expecting to have a profit or income buying stocks, property, or shares in a fund.
The investment risk creates a tension that keeps many people from getting started investing in the first place because there is always the possibility to lose a part or the entire investment. However, higher risk corresponds to a greater chance of making more money.
After clarifying these concepts you must choose whether to use the unspent money as savings or to invest. This is a critical choice because that determines what you should do with that money and the timing for spending them determines what you should do with it.
People have different ‘spending goals’ based on different timings:
- short-term goals are things you plan to do within the next five years (ex. buy a new car);
- medium-term goals are things you plan to do within the next 10 years (ex. buy to your little child a house in the future);
- longer-term goals are ones where you will not need the money for ten years or more (ex. plan to retire in 35 years from now).
If you have short-term goals, a bank savings or a money deposit account are perfect choices. In this case you should not use your money to invest because they will be exposed to market volatility. This means there is a real possibility that an investment could drop in value and if you invest for less than five years you might make a loss.
In case of medium-term goals, cash deposits might sometimes be the best answer, but it depends on how much risk you are willing to take.
The savings account has no volatility and will always pay a reliable, but very low, return. If you are more flexible, you might consider investment but you have to be prepared to take some risk with your original capital trying achieve a greater return on your investment than it would be possible by saving alone.
For longer-term goals, savings account or a low-yield cash deposit are not a good choice because inflation can seriously affect the value of cash savings over the medium and long-term. It would be good to invest because you will have more opportunity to increase your money.
In this case, not taking enough investment risk might actually be the riskiest move of all.
You can also lower the level of risk you take when you invest by spreading your money across different types of investments (ie diversification).
What we learn: be clear on why you are investing in the first place and never expose your money to more risk than is absolutely necessary to accomplish your goals.