The stock market can seem enticing, especially if you’ve reached a savings goal and have no long-term plans.
But as often as we hear exciting news of investors making millions from stocks, we also hear stories of those who lost everything on a bad gamble.
If you’ve been saving for a while, and you feel confident in your income, then you should consider some form of investment.
Stocks can be a fantastic way to earn a secondary income, especially if you plan on a long-term investment.
However, it isn’t a simple decision to make, and you should always keep some savings to hand. Read this guide to find out whether it’s time to invest in stocks, or whether to keep working on the emergency fund.
Saving Vs. Investing Money
Saving money is taking a portion of your income and putting it to one side. This money might be kept on hand or in a savings account where it might gain some interest, but will primarily stay untouched.
With savings, you have given yourself money on hand for an unexpected emergency. A savings account is also used to help you reach a financial goal, or to make a large purchase.
Investing is when you use your money to buy assets, such as stocks, which should then return you a profit. Investing in stocks involves a certain level of risk, as there is no guarantee of profit.
However, stocks can help to grow your wealth, and provide you with a second source of income.
Saving money should always take priority over investing money. Once you have savings, as well as a steady income, it’s time to consider investing in stocks.
Advantages Of Saving
The main advantage of saving is that it is, as the name implies, safe. Job losses, car accidents, and medical emergencies are all examples of unexpected circumstances your savings can cover.
These savings are known as an emergency fund.
An emergency fund is a savings account you turn to when something goes wrong. It provides you with financial security. A good emergency fund should have enough money to cover roughly three months of expenses.
Savings also give you quick access to stable money. Money in a savings account isn’t subjected to the market — it’s always worth exactly what it’s worth.
And when you want access to it, the money is there for you. Savings are liquid and can be used immediately.
If you plan on making a large purchase within the next two to five years, focus on saving. You will have immediate access to the money, and you’re unlikely to see real gains from the stock market during this period of time.
There’s one final advantage to saving: it allows you to enter the stock market. Without savings, you’ll have no money to invest.
The big disadvantage to savings is that in time the money can’t grow. Even a high-yield savings account will only help keep pace with inflation.
Advantages Of Investing In Stocks
The major advantage of investing in stocks is that it can provide an extra income. Money invested in stocks is able to grow in worth, even after inflation, providing you with a decent return on your investment.
When you invest in stocks, you get the chance to build up a portfolio of shares. As these shares rise in value, so do your investments. When you sell them at a later date, you could potentially make a fortune.
Over a long term period, the average annual return for stocks is 7% to 10%. Sat in a savings account, this money would only be keeping its value. With smart stock investments, you can watch your profits grow.
Of course, with the potential for profit comes the potential for loss. There’s no guarantee that your stocks will return a good investment. You’re subject to the marketplace, which is out of your control.
If you really want to make money from stocks, it requires some level of effort. The more work you put into researching companies, the better off you’ll be. But not everyone has the time to do this.
Another disadvantage of stock marketing investing is that you don’t have immediate access to the money. If you need car repairs, for example, you couldn’t pay with money in stocks.
Which Is Right For You?
Saving and investing in stocks isn’t an either/or choice. If you want to invest in stocks, you have to have savings. Don’t just exchange your emergency fund for stocks, or you’ll find yourself caught short when life gets in the way.
It’s time to invest some savings in stocks when you:
- Have an emergency fund set up that covers at least three months of living expenses. And that means all expenses. The cash in your emergency fund should be able to keep you afloat for several months if you’ve lost your job.
- Have no short term goals. If you’re saving to buy a house in three years’ time, don’t put your money into stocks. As a general rule, if you want access to your money within two to five years, you should keep it in a savings account. The stock market won’t return a great enough profit in this time period.
- Can afford to wait. The stock market is all about the long term. If you don’t mind having your money tied up for several years, then it’s time to invest. After roughly five years, you should start to see an average yearly profit of plus 7%.
- Have no debts. Before you start your emergency fund, and well before you consider the stock market, you need to pay off any high-interest debt.
Overall, you should consider investing in stocks when you have enough savings to live comfortably.
Final Thoughts
If you’ve been saving diligently for several years, you have a suitable emergency fund, and your big life expenses are covered, then it’s time to consider stocks.
By moving some of your money from savings to stocks, you can start to collect a profit and make your money work for you.
Financial Disclaimer
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