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When to Consider Saving and when to Consider Investing

If you read my previous article on why cash isn’t the best place to park your money, you might be tempted to withdraw all your money and go find the closest available investment opportunity. However, my last article presented a generalization and certainly does not apply to every situation. So, in today’s article, I’ll be exploring situations in which you shouldn’t invest, and instead, save your cash.

Right off the bat, you should always keep a certain amount of money for emergencies. This money should always be in cash. Depending on your situation, you should aim to have 6-12 months' worth of expenses in a savings account. You should also keep cash in your checking account for day to day spending and to cover any unexpected bills or purchases

You definitely should not keep your emergency savings invested because most investments have some level of volatility, and are illiquid when compared to cash. In an emergency, you’ll likely want access to money right away, so going through the hassle of selling your investments (in some cases waiting until markets open), waiting for them to sell, and waiting for the money to transfer from one account to another is not the situation you want to be in.

You should also save cash if you're in a precarious situation, so if you think you may lose your job soon, or if you're working temporary jobs/contract positions. In this case, you want your necessities and essentials to be covered, not your retirement account contributions. Consider holding off on adding money to investment accounts, and instead hold onto your earnings in a liquid account so you can access it freely.

Similarly, if you’re saving up for a big purchase, like a down payment for a home, it's best to keep your money in cash. This is because most investments rise and fall in value regularly, and such price movements are unpredictable. So, if you’re three weeks from hitting the amount needed to buy your home, and the stock market tanks, you either have to delay your home purchase and sit around until the market recovers, or you sell your investment at a loss.

As such, it's best to keep your money in a more liquid alternative, like certificates of deposit or money market funds, which keep your money safe (not subject to volatility), offer interest, and are somewhat liquid. Read more about CDs and money market funds here.

Choosing between saving and investing is always dependent on an individual’s situation. When choosing between the two, check if your basic, day-to-day expenses are covered, to the point where you wouldn’t have to worry if you lost your source of income. Similarly, consider your timeframe - how soon you need access to the money. If you want it in the near future, saving in cash is probably best. If you're comfortable not seeing your money for another 5-10 years, consider investing it. As a disclaimer, I am not a financial advisor in any capacity, and all my writing is simply my opinion. None of this is financial advice, consult a licensed financial advisor before making any decisions.

With that said, thanks for reading, I hope you found this helpful, and I’ll catch you in the next one.

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