If you have money saved up, you may be wondering if it’s safer to store it in a savings account rather than invest it in the stock market. You aren’t alone. A lot of people—even those with investing experience—ask this question.
Unfortunately, there’s no clear answer. It really depends on your financial goals and your current situation. (We know that’s frustrating to hear, but it’s true.) In this article, we’ll discuss principles that will help you decide whether it’s best to save or invest your money.
When to put money into savings
There are two good reasons to keep your money in your savings account:
First, your savings account should hold your emergency fund. This is a sum of money kept in a safe place that you can access quickly in case of a financial emergency, such as an illness, job loss, or sudden expense. Most financial experts recommend having three to six months worth of expenses kept in a savings account.
Second, saving money in a cash account is for building up for a specific purchase, such as a new roof, the down payment on a house, or any other expense you can predict. You don’t need a traditional savings account for this (because you won’t need the money immediately), but you should park the money in a stable cash equivalent account, like a very short-term bond or a money market account.
The obvious upside to an account like this is stability and liquidity—being able to access the money you deposited immediately. The downside with such cash equivalent accounts is that you’ll earn very low returns on your investments, frequently below the rate of inflation, meaning that if you held onto them long enough, you’d actually be losing money since the cost of living would outpace the investment growth.
When to put money into investments
If you intend to hold onto your money long-term, consider investing in something that will allow you to enjoy the growth of the stock market. Despite some volatility, the stock market historically rises above the rate of inflation.
Look at a chart of the Dow Jones Industrial Average’s last hundred years. Adjusted for inflation, the market has been up on average about 7% per year. You’ll never get those kinds of returns stranding your money at the bank.
How long is considered “long-term”? The rule of thumb is that more than five years constitutes a safe time horizon. If you can do without the money for five years, put it in your investments. Before you dive in, spend some time learning about investing basics, especially regarding active vs. passive investing.
