Personal Finance

Saving Isn't Enough, You Need to Invest Too

By Herbert Kyles, AWMA®

Recent surveys have demonstrated that 20- and 30-somethings are excellent at saving money. In fact, 38% of respondents said they saved half their paychecks. Half of the respondents reported cutting back on the money they spend on nights out to make that happen, and 42% said they were foregoing expensive vacations in favor of saving more. If you’re in your 20s and 30s today, you’ll need your savings if you want to be financially successful in the future. But you will also need something else a lot of millennials are skipping out on: investments.

The Effects of the Great Recession

If you’re like most people in this demographic, you remember the Great Recession as something that did a lot of damage to your family’s financial situations. Maybe family members got laid off or lost their homes. Maybe you saw your parents’ dreams of retirement sail out the window as the market trashed their 401(k)s and nest eggs.

You might have struggled yourself if you graduated and found no one would hire you. Or if you could find a job, it was low-paying, which could have set you back financially, even several years into your career. In the wake of the recession, we saw the Occupy Wall Street movement take over the streets of New York for a time. All of this could have left you feeling like the stock market in general couldn’t be trusted, and that it was safer to save your money. (For related reading, see: Merrill Edge: Millennials Are Self-Directed Savers Thanks to Great Recession.)

The Big Risk You Take by Saving Money and Not Investing

Yes, investing comes with risk, but you can also invest in a way that allows you to grow wealth while properly managing the risks you take. Saving comes with risks, too. Yes, even if you put your money into a regular bank account, you’re taking on risk, and over time, that risk becomes greater than if you had put the same amount of money into a conservative investment portfolio in the market.

The biggest risk is inflation. The average long-term rate of inflation is 3.22%, which means that steadily over time, the money in your bank account loses value. In a few decades, your cash will be worth less than it was when you started saving. The historical rate of return for the S&P 500 over the last 90 years, on the other hand, is 9.8%. While your cash is likely to be worth 3% less in 30 years than it is today, your investments would likely be worth significantly more.

How to Build Enough Wealth to Enjoy Financial Freedom

Make no mistake, saving money is still critical to success. But you should consider investing, too. Not convinced? Consider this: all investments come with risk, but some are less risky than others. If you can’t stomach the thought of potentially losing some of your nest egg, there’s a conservative portfolio for you.

Investing doesn’t have to mean throwing all your money into Bitcoin. It’s not all or nothing. Nothing is guaranteed when you invest, but there are a lot of strategies you can use to help you earn the return you need to meet your goals without putting too much of your money at risk. (For related reading, see: 6 Asset Allocation Strategies That Work.)

Asset allocation and diversification are two such strategies you should use to your advantage.* You have to invest to grow significant wealth. Unless you’re independently wealthy, most people need to invest to accumulate enough assets to reach big goals like financial freedom. That’s thanks to compound interest, or compounding returns. Compounding happens when you put cash into an investment and it earns a return. You keep that return in the market, and then it can earn a return, too. That creates an exponential effect that snowballs over time.

Invest If You Want Financial Success

The bottom line is you need to invest at least some of your savings. You don’t have to invest everything, and in fact, you should keep a small cash cushion that you can quickly, easily access in the event of an emergency or if you have an unexpected expense you need to deal with. Otherwise, put your money to work for you so you don’t have to work so hard yourself. Investing isn’t gambling if you have the right strategy in place and know how much risk is appropriate for you and the goals you want to reach.

It can sound complicated (and maybe even a little scary), but you don't have to do it alone. A good financial planner can provide you with comprehensive advice that considers your savings and your investments, and how you can leverage both to enjoy financial freedom as quickly as possible.

(For more from this author, see: 3 Options for Millennials Saving for Retirement.)

*Diversification/asset allocation does not ensure a profit or guarantee against loss. The information presented is not intended as financial advice, and you are encouraged to seek such advice from your financial advisor.

This article was originally published on Investopedia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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