Should You Save Money or Invest? Here's How to Decide

Authors: Chris Neiger

Source: The Motley Fool

Deciding what to do with some extra cash can be difficult. Putting your money into a high-yield savings account can be a great option, especially with some accounts paying APYs of 4% to 5%.

On the other hand, there are certainly times when investing your money is the right decision so you can have enough for retirement or another far-off goal.

So, how do you choose which is the best option? Let's take a look at a few factors to help you decide.

1. Consider your current financial situation

The first thing you should do before doing anything with your money is to consider your current financial situation. Here are a few questions you want to consider: 

• Do I have enough money in my emergency fund?
• Do I have high-interest debt to pay off?
• Will I need easy access to my money over the next few months or years? 

The answers to these questions can vary widely depending on your age, financial situation, and personal circumstances. But thinking through them will help you determine what's important to you right now and where you want your finances to be in the future.

For example, investing your money might be the best option for you if you have little or no high-interest debt and already have the recommended three to six months of expenses in an emergency fund. However, if you have little or no cash for a rainy day, it's probably better to put your money into a savings account.

2. Determine your long-term financial goals

This is related to the first idea, but it differs in that you zoom out and look at your financial goals based on what you want your money to accomplish, instead of addressing an immediate need (like paying off a credit card balance).

For example, you might want to ask yourself these questions: 

• Do I want to put money aside for a house down payment?
• Do I need more money in savings in case I lose my job?
• Do I want this money to earn a maximum return for retirement? 

Notice how these questions are focused on long-term goals and may involve larger sums of cash than starting an emergency fund or paying off a small credit card balance.

Let's say your long-term goal is to buy a house. You'll need to have easy access to that money, making a savings account an ideal place to put your cash. In contrast, investing your money in a brokerage account is probably the best move if you want to earn the most money possible.

3. Do the math

In addition to considering your current financial position and your long-term goals, it pays to look at how much you'll earn with a savings account vs. investing your money.

Let's assume you have $10,000 to invest and can earn 5% APY with a savings account or 10.2% (the historical average annual rate of return for the S&P 500) by investing it. Here's how your money could grow over 30 years:

Data source: Author's calculations.

It's clear from these hypothetical situations that investing your money is the better option for maximizing long-term returns. (Plus, you're unlikely to earn 5% from a savings account over three decades -- the APYs on savings accounts lately are notably high.) This is why once you've paid off any high-interest debt you have and put money into an emergency fund, you should consider investing any additional cash you have.

Putting money in a high-yield savings account and investing additional money should both be on your financial to-do list. Just make sure that whatever you decide to do with your money aligns with your near- and long-term financial goals.

This article was written by Chris Neiger from The Motley Fool and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.