Saving or Investing: What Should I Do?

Saving or Investing: What Should I Do?

In the world of finance, savings and investment are two concepts that are often confused. Despite the similarities, there is one thing that distinguishes them: their purpose.

So should I save or invest? The answer it’s both. A balanced management of personal finances implies reserving part of the income for the constitution of a savings account and, whenever possible, for an investment component, so that you can achieve your financial goals in the short, medium and long term.

Savings vs. investment

In a very simple way, saving implies put money aside in a safe and accessible place to use in the future. The creation of this savings, or emergency fund, is essential to accommodate the financial impact of unforeseen situations, such as unemployment, illness, or any unexpected expense that goes beyond your usual budget.

to create this emergency fund, account for all the expenses you usually have during the month, such as house rent, electricity, water, food, fuel, etc. Ideally, your emergency fund should be at least six times that amount.

In the same way, the constitution of a savings account can have a specific short or medium term objectivesuch as buying a good or service, or carrying out a project, such as traveling next summer, changing a car, renovating the kitchen or taking a course.

Whatever the objective, the Savings are associated with the accessibility of money – must be able to redeem it immediately or within a short period of time – at low risk and, consequently, at a low profitability. The idea is that there is minimal risk of capital loss and that your money will generate some return until you need it.

Investing, on the other hand, implies use part of your money to buy an asset with the ability to generate a good return over time, increasing its financial availability in the long term.

In this case, we are talking about capital that will not be so easily accessible, in which income and capital itself are not guaranteedbut with the potential for much higher returns.

With the creation of this component, you will be able to pursue longer-term goals, such as paying for your children’s university, setting up a retirement fund or simply maximizing your future earnings.

Also read: How to make an emergency fund

Where to start?

the first step ofyou’ll seeer the constitution of the emergency fund. It is this reserve that will allow you to face unexpected expenses that threaten to compromise your financial health. To this end, you can commit to saving a certain percentage of your monthly income, which you must allocate to this fund.

Depending on your financial situation, you may continue to do regular reinforcements to enhance this safety cushionwhich will give you the security of having funds available to accommodate any emergency.

Once this fund is set up, start saving for short and medium term goals. Want to take your dream trip? Start your own business? Offer a more expensive gift to a family member? Regardless of the objective, it is important that you set aside the money you need to fulfill it.

The next step will be constitution of a component intended for investment, with a view to generating higher returns in the future. You should only apply money to this component that you are sure you will not need, at least in the medium term. Did you earn extra money by selling an asset? Did you receive an inheritance? Do you already have a savings account and continue to save? This money can be used for investment. Still, it is essential to responsible and balanced choices to apply the money, as there is a risk of capital loss.

Also read: 10 challenges to turn savings into a game

What products to choose?

For the constitution of savings, it is desirable to opt for low-risk products such as term deposits, savings accounts, Savings Certificates, Treasury Certificates and some PPR with guaranteed capital. The return will not be high in any of the options, but you will have the security of being able to easily withdraw your money and with minimal risk of loss.

In terms of investment, there is a wide range of possibilities, from stocks, bonds, mutual funds, ETFs, even real estate. The choice must always depending on your investment profile and obeying a golden rule: diversification.

Diversifying an investment implies distributing it across different asset classes, geographies, sectors of activity, and maturities, in order to split risk and return in a balanced way. In this way, you will be investing in various financial instruments that react differently to the market and also to economic cycles.

Also read: Investments: Behind the obvious…

Basic principles for choosing financial investments

There are a few principles you should follow before deciding where to use your money:

  • Start by creating a emergency fund;
  • define goals and deadlines for your savings;
  • Find out about the characteristics of the products and carefully assess the risks;
  • Take into account your investor profile: have risk tolerance? Are you willing to wait longer for better returns?
  • Track the evolution of applications over time and be aware of alternatives available on the market.

At an early stage, it is always desirable that you seek the help of professionals, which will be able to inform you about the available options and the characteristics of each product. Whether at your bank or with any other intermediary, clarify your doubts and never opt for a product you don’t know or understand.

Also read: What is your investor profile?

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