3 Times When it’s Better to Save Than Invest

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Savings accounts can have a poor reputation because they have such low returns, particularly in today’s economic climate. It’s true that
when taking inflation into account, you can actually lose money on a savings account in the long run. The Federal Reserve has not been kind to savers, especially since the financial crisis when the Fed dropped the interest rate to a historic low. But even in the current American economy, saving has some distinct advantages over investing.
“An average saver will do better than a great investor who doesn’t save,” CFP professional David A. Schneider told Bankrate. While the two strategies work well together, without saving, investing would not be possible. While investing will likely get you higher returns in the long run, this may not be your primary financial goal. It all depends on the context of your finances, where you are in life, and what’s important to you. Here are three times when it’s smarter to prioritize saving.

1. When you’re in debt

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If you’re still in major debt, investing should definitely not be your priority. First, you want to get rid of that debt, whether it’s for medical bills, credit cards, education, etc. The SEC recommends paying off all debts before both saving and investing. But if your only debt is, for example, a student loan or a car payment that you have under control, saving may still be a good idea.
Credit card debt, because it is so pervasive, should not be ignored. As long as you are still able to make student loan payments on time, however, it’s worthwhile to build up an emergency savings account before paying off the full balance on your loan, despite the interest that will build up. If paying off all of your debts and loans at once would put you in place where you couldn’t afford the next big expense that comes along, you may just end up in debt all over again.

2. When you don’t have an emergency fund

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Some people caution against putting too much money into a savings account for emergencies because of the losses associated with inflation, but no emergency fund at all would be much more costly. According to The Cheat Sheet’s guide to saving, your priorities for optimal financial security should be as follows:

1. Emergency fund (one month of expenses)
2. 401(k) with company match
3. Credit card balances
4. Larger emergency fund (three to nine months of expenses)
5. IRA
6. 401(k)

The only investment that trumps saving is a 401(k) that offers an employee match, as this is essentially free money to put toward your retirement that you don’t want to miss out on. Otherwise, a substantial emergency fund should be your priority, especially if you have dependents or variable income. A mere 38% of Americans have enough money in their savings to pay for surprise expenses, like a $500 car repair or a $1,000 emergency room visit. An unexpected job loss could do even more damage if you don’t have adequate savings.

3. When you want to prepare for big expenses

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The primary advantage of saving accounts over investments is access. That’s the trade-off when it comes to returns. There may be certain penalties associated with withdrawing money from an investment account, but money in a savings account is essentially there for you whenever you need it. Federal law allows no more than six withdrawals per month from savings accounts, which should be plenty if you are reserving those withdrawals for large or unexpected expenses.
Even when it’s not necessarily an emergency, there are times when it’s wise to have money set aside for both expected and unexpected expenses. You can count on the fact that moderate car repairs and medical bills will crop up, and you may want to put money aside for planned expenses as well. Here’s a general rule to follow: Save for short term goals and invest for long term goals. You’ll want to save for a new car or an upcoming down payment on a house, for example, but your retirement or a child’s education 10 to 15 years down the road may warrant investing.