Spend? Save? Or Invest?

Depending on our current financial situation, we may all use our money in different ways.  We may want to save our money in cash just in case of emergency, we may want to spend our money on nice things, vacations, and dining out, or we may choose to invest our money for the long term.  Regardless of what we choose to do with our money, it’s good to know that we have options.

We should save our money if…

We have a specific short term goal such as a vacation.  Short term goals are goals within a year that don’t require us to invest for the long term. 

Short Term Savings should always be accessible which means they need to be liquid.  In case we have an emergency we will need access to our short term savings.

An Emergency Fund Savings Account could be used to cover the cost of expenses during months when our income may be lower or our expenses may be higher.

The amount of short term cash savings that we should have definitely depends on each person’s individual situation.  Some people continuously save 5-10% of their annual income, and some people save until they have the equivalent of 3 months gross salary saved in their account.

Investment options for short term savings goals are cash savings such as Money Market Mutual Funds and T-Bill Mutual Funds.  High Interest Savings Accounts are also a good option for short term savings.

We should spend our money if…

We have bills.  There is no point in saving our money if we have bills to pay. Our monthly bills should always be paid on time, before we think about saving.

We have debt.  Accumulating interest on Student Loans, Credit Cards, and other Debts is never good because the cost of borrowing increases over time.  It is better to pay off high interest debt than it is to save money at a lower interest rate.

We really want to do something, experience something, or try something new.  I never feel guilty about spending money on a new experience such as travelling or eating out a new expensive restaurant.  I recently spent a day at a Spa and treated myself to a facial as well as a massage.  I have never been to a day spa before and I wanted to try it.  It won’t become a regular habit, so I didn’t mind paying to try the one time experience.

We should invest our money if…

All of our bills are paid and have no other need for the money.  If we have a disposable income every month I suggest that we invest for the long term.   Long term investments can be more profitable. 

We can afford it.  If we have a monthly income that allows us to invest for the long term then we should take advantage of it.  We shouldn’t invest if we are going to end up in debt at the end of the month. 

We are saving for a long term goal such as buying a house or our retirement.  Long term goals are usually 5 years away or longer. 

Investment options for long term savings goals are Mutual Funds, Stocks, and other risky but potentially profitable investments.  The longer time frame that we have to invest, the less we are concerned about fluctuations in the short term and therefore we can take more risk.  If we want to buy a home in 5 years and we want to retire in 25 years, we shouldn’t have the same investment options for each goal.

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