When it comes to managing your money, there’s a season for everything: there’s a time to spend, a time to invest, and a time to save.
As you consider the full picture of your financial life, three important questions arise:
- What financial season are you in today?
- What financial goals are you pursuing for tomorrow?
- Which strategy is best for you right now: saving vs. investing?
If you recently immigrated to the United States, it may seem impossible to answer those questions with true confidence.
Here’s the good news: investing and saving strategies are always helpful as you seek to build your version of the American Dream. No matter your age, career, socioeconomic level, or immigration status, you should know that there’s a strategy for everyone.
To help organize this rather expansive topic, we divided this article into three main parts.
After a short explainer on the tenets of “saving vs. investing,” Part 1 will cover when to invest, Part 2 will cover when to save, and finally, Part 3 will cover how to save.
Let’s dive in!
Key Article Takeaways
Prefer the shorter version? No problem.
Here’s the article summary:
- If you need cash in the near term, prioritize saving over investing.
- If you’re thinking about buying stocks, first set a budget, tackle debts, and establish an emergency fund.
- If you invest, start slow, be patient, and favor long-term stability over short term success.
- If your employer offers a 401(k) match, take full advantage of it.
Saving vs. Investing Explained
Though the terms are often used interchangeably, saving and investing are two very different strategies.
When you save, you store your money in a bank account with relatively low returns and equally low levels of risk.
By contrast, investing exposes you to higher levels of risk with the potential for outsized returns.
That’s true whether you invest in the stock market, in cryptocurrency, in real estate, or in any other “alternative” investment.
As fundamentally different as saving and investing may be, they’re still united in one key area: they’re both strategies that can help you build wealth over an extended period of time.
The question is: which path should you choose?
Deciding on one, the other, or a combination of the two strategies will depend on your unique financial situation.
Part 1: When to Invest
Investing is a long-term endeavor defined by volatility, especially when it comes to the stock market. In other words, the stock market is like a financial rollercoaster. Some parts of the ride are thrilling, while others are disconcerting (to put it mildly).
For most Americans, therefore, investing isn’t about turning a short-term profit. Instead, it’s about building a savings “nest-egg” to enjoy throughout retirement.
There’s a good reason for that.
Historically, the stock market averages a return of over 10%, and it consistently beats inflation by about 7%. In 2022, where commodity prices are surging and the dollar’s purchasing power is declining, investing may seem like an attractive option for your discretionary income.
But hang on! Before you put your money in the market, it’s smart to keep a few things in mind. For starters, remember that the stock market is highly volatile. While gains are possible, losses are inevitable.
In just the last two years, we’ve seen both the highest highs and the lowest lows. While 2020 and 2021 were banner years for investors, 2022 is widely considered one of the worst starts in recent history.
Such dramatic swings are par for the course.
Retirement Accounts: Explained
In the world of investing, you’ll often hear about things like “IRAs” and “Roth IRAs.”
Though the terminology may sound complex, it’s pretty straightforward: an individual retirement account (IRA) is simply a tax-advantaged investment account. In other words, you’ll never have to worry about getting taxed on trades completed in an IRA — so long as you leave the money in your account.
Once you consider withdrawing your money, however, things can get a little tricky (as we’ll discuss in a bit).
For now, there are three types of retirement accounts to consider:
- Traditional IRA: Contributions to a traditional IRA are “tax-deductible,” which means that the amount you contribute directly reduces your taxable income.
For example, if you make $50,000 a year and put $5,000 from your earnings into a traditional IRA, your taxable income would then be $45,000.
- Roth IRA: Unlike a traditional IRA, contributions to a Roth IRA are not tax-deductible.
However, because you will have already paid tax on your contributions, your withdrawals will be 100% tax-free.
The question then becomes: would you rather pay taxes now, or pay them later?
Given the fact that tax rates will likely increase, it may make more sense to pay your taxes today — especially if your peak earning years are ahead of you.
- SEP IRA: If you’re self-employed, or a small-business owner, SEP IRAs are designed for you. As with a traditional retirement account, SEP IRAs contributions are tax-deductible and grow tax-deferred until withdrawal.
If you’re interested in opening an IRA, you can do it online through any broker, robo-advisor, or financial institution in a matter of minutes.
Example 1: The Value of Long-Term Investing
As we mentioned earlier, investing is a long-term game. Here’s a brief example to explain why that’s true:
Let’s say you’re 32 years old, and you invested $100 in a popular tech company through your IRA.
A year goes by, and the stock climbs to $150, at which point you decide to cash out.
The problem is, you’re only 33. If you withdraw money from your IRA before the age of 59 1/2, two things will happen:
- You’ll be taxed at your ordinary tax rate (depending on your current level of income).
- You’ll be assessed an additional 10% “early withdrawal” tax by the IRS.
So even though you made $50 on your initial $100 investment, you’ll end up paying at least $30 in taxes, thereby reducing your total capital gains to a mere $20.
In major cities like New York or Los Angeles, you’ll be lucky if $20 can buy you a decent lunch.
Note: This example is not intended to discourage you from investing. Instead, it’s meant to highlight the risks of investing exclusively to reap a short-term profit.
When it comes to investing, time is your best friend.
After all, time is what unleashes the power of compound interest—what Albert Einstein famously dubbed “the eighth wonder of the world.”
Example 2: The Power of Compound Interest
For a second example, let’s say you invested $10,000 in your IRA at an annual return rate of 10%. If you added an extra $1,000 each month for the next twenty years, your starting amount of $10,000 would be worth over $785,000 by the year 2042.
That’s not sorcery—it’s compound interest.
In order to capitalize on compound interest, you need to have significant sums of cash to invest. And you also need the time and patience necessary to let your investments grow, in spite of unnerving periods of volatility.
If you’re not yet in a place where investing seems feasible, that’s okay. In many cases, it may be more strategic to use your available cash for:
- Building up your emergency fund.
- Paying down high-interest debt.
- Investing in yourself (and in your marketable skill set).
Savings strategies will help you achieve these goals and replenish your financial reserves, until you reach a place where you can invest with confidence
Part 2: When to Save
We’ll let you in on a little secret: it’s always a good time to save, no matter where you are in life’s journey.
Of course, while saving is always important, there are some occasions in life where it’s vital. Such moments include saving to make a down payment on a house, to reduce your student loan balance, or to cover an annual car insurance premium. These expenses require having cash on hand, safely secured in a savings account.
But that’s not the only reason saving is important year-round.
In addition to helping you make targeted purchases, your savings can help you prepare to cover unexpected costs—like paying down a major medical bill from an accident.
To help provide a bit of financial breathing room, experts recommended having at least three-to-six months of emergency savings on hand.
After all, the future remains uncertain, and financial hardships can quickly descend, as the last few years clearly revealed.
Part 3: How to Save
Here are some actionable strategies to jumpstart your savings journey:
- Build a budget: While budgeting strikes fear in the hearts of many, we encourage you to view it instead as an opportunity to restructure your financial life.
Need help getting started?
Try the 50/30/20 budget, where 50% of your spending goes to your needs (like your rent and food costs), 30% covers your wants (like that new TV, or tickets to a concert), and 20% goes straight to the bank.
Click here to learn more about the 50/30/20 rule (plus some great budgeting apps to help streamline your savings).
- Invest in yourself: Why buy shares in another company when you can use the money to invest in yourself, your business, your career, and your marketable skills in general?
As your business acumen and value increase, so will your income (and savings).
After all, you are your own greatest investment.
- Establish an emergency fund: Rainy days are unavoidable, but an emergency fund can help your finances stay dry (and give you confidence through all seasons of life).
Whether you save for one week of expenses, one month, or an entire year, know that every dollar saved will come in handy down the line.
Want to learn more? Click here to check out our in-depth article, “Three Ways for Immigrants to Build an Emergency Fund.”
- Tackle outstanding debts: A few years ago, a young shareholder asked legendary entrepreneur Mark Cuban for his best investment advice .
As he told the boy, “[Pay] off whatever debt you have.”
Indeed, nothing erodes savings like debt, whether it derives from student loans, auto loans, or credit cards. As Cuban advised, “If you pay off that [7%] loan, you’re making 7%. That’s your immediate return, which is a lot safer than trying to pick a stock.”
In other words, when you pay off your debts, you’re paying yourself back (and protecting your financial future in the process).
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