When you’re just getting your finances in order, what to do first is tough to sort out. So how much of your money should be saved and how much should be invested? The average savings account pays just 1% interest, but the stock market has returned around 7% on average for the past few decades.
The purpose of your savings is to fund short-term goals and cover emergencies. Ideally, you’ll have several savings accounts that are earmarked for different purposes. Mini-emergencies, 3-6 months living expenses, and some goal accounts like paying for a new car or going on vacation next summer.
The purpose of investing is to fund your long-term goals and grow your wealth. Retirement, a downpayment on a house, starting a business – things that take a longer time to work toward. Making your money work for you is a better plan than trying to save your way to wealth.
So, once you have your basic savings accounts in order, investing should be your focus. Money favors time and by investing in the market sooner rather than later, you get to capitalize on both.