New year, new financial plan? As we welcome the excitement of new beginnings in 2022, it’s a prime opportunity to emerge from some of the chaos over the last two years. But even the most experienced advisors are being put to the test during the current market and economic climate. With a potential future rise in taxes, the cost of living continuing to rise, and inflation still on the upswing, deciding what to do with your money and when has never been more important.
Just as it always has, money makes the world go round. And ultimately, your financial decisions will determine what that means for you personally. This year, the big question you're contemplating may be whether you should save your money or invest it.
Both saving and investing can help you achieve your goals in different ways — but that depends on what those goals are. Let’s check out some of the pros and cons of either option so you can make more informed decisions as to whether you should save or invest your money in 2022.
Pros of Saving
When we refer to saving, it means putting money into a savings account at a secure financial institution that offers an interest-bearing option. To start, the dollar amount in your account will never decrease. What you put in there, stays in there — unless you consciously decide to make a withdrawal. And even if you do, there’s no penalty to access it whenever you need to. This can be beneficial if you have a savings goal you’d like to hit over a certain short-term amount of time. Saving also safeguards you from market uncertainty.
Savings accounts can be great as backup plans or emergency needs as the accounts are very accessible. They are excellent at helping you achieve your short-term and some mid-term spending goals. Since we can’t quite predict what 2022 holds for us, saving money is a good idea when it comes to cushioning emergency funds in case the worst does happen.
Cons of Saving
Saving money also has downsides, and with rising inflation, those downsides are pretty sizable. With inflation continuing to worsen, the money you save each year will decrease in value. The only thing that can offset inflation in your savings account is earning interest, but often, interest rates can’t keep up with inflation. It may not be the best year to rely on a savings account unless it’s for emergencies. And in contrast to sparing yourself from market volatility, you could also miss out on the potential market gains, as well as a notable amount of compound interest. If you’re not on track to reach long-term financial goals, such as retirement or financial independence, then saving probably isn’t the best approach. It’s important to understand the risks and benefits, which may mean talking to an advisor to learn more.
With minimal risk of real losses in a savings account, there is a trade-off, in that there are minimal returns.
Pros of Investing
Investing is a great long-term way to grow your money. This strategy makes your money work for you as you can stay ahead of inflation and let the value increase on its own. By investing, your contributions earn but also you take advantage of compounding. Contributing to a traditional IRA, Roth IRA, or 401k in investments will help save your money since you’re only taxed the year that you make a withdrawal. The benefit of compounding is that you’re always earning more. The longer you keep investing, the more interest or earnings you’ll earn. It’s a never-ending cycle of growth, which is why it can be really beneficial to you in the long run.
Cons of Investing
The cons of investing are the inconsistency. The stock market is constantly fluctuating, and if you’re looking for a quick fix to earning money, it may not be the best place for you. Investing always involves risk, and it’s up to you to decide whether or not the ebb and flow of investments are worth it. If you don’t have adequate cash to cover up at least three months of fixed expenses, investing could put you in a very dangerous hole. And withdrawing money too soon may come with added penalties.
More Helpful Tips
Save First: If you’re looking to invest but you don’t have a cushion of funds to support you for at least six months, you need to save. Once your savings are sound enough to provide you with that security, you can explore other avenues of investing.
Be Realistic: Investing is a waiting game full of ups and downs. Don’t expect to see your money skyrocket in one month. The market is unpredictable so the outlook can change from day to day. Don’t let the strong returns since the 2020 bottom inspire poor investing decisions guided by FOMO (the fear of missing out). This recovery from a pretty fluke situation in 2020 is unique, so there’s no telling how long this will last or the next time the market makes a correction.
Ask a Professional: These past few years have been a rarity in terms of the market lows and recovery, and as a result, many individuals have become do-it-yourself investors because of a few lucky stocks. Don’t trust your finances to advice from a generalist or Twitter account — look for a real advisor to help you navigate your investments. The unwinding of Federal Reserve policy and monetary tightening (both domestically and globally) will be a process, and an advisor will be able to translate it all into a language you can understand. Everyone has different goals when it comes to their finances, so trust a professional to help you with your own unique situation.
K Wealth Advisors In the end, your specific goals and needs will ultimately determine whether you should save or invest. If you’re looking for guidance in the new year on your strategy, contact K Wealth Advisors to schedule a GoodFit meeting and discuss your goals and options today. #KWA