Many people often debate on the best way to store their surplus income to benefit them in the future. Some of them argue that saving your income in an account is the best way since you can easily access your money in the event of an emergency. Others argue that it is best to invest your money to realize profits from it in the long term.
However, it is essential to note that various factors may affect your savings or investment plan. They include the following.
1. Per Capita GDP
One of the most significant determinants of whether an individual can save or make investments is the level of per capita GDP. Low-income earners often use most of their income to purchase essential commodities. On the other hand, high-income earners may purchase luxury goods if they prefer to do so.
A household with higher income levels does not need to use a higher percentage of their income for consumption, and they can set aside some of it for saving. Likewise, if you aim to save or invest your money, a higher percentage of your income must not be spent on basic needs.
2. Level of Confidence in an Investment Plan
It is worth noting that an investment is riskier than saving. That is why it is advisable to invest if you are confident about its economic prospects, future costs, and demand.
However, it is essential to note that confidence isn’t always rational. It is affected by interest rates and economic growth, and the general and political climate surrounding the investment. Therefore, it is advisable to cut back on making an investment decision in the presence of uncertainty until you can predict how the event will unfold.
3. Inflation Rates
Inflation rates can influence both savings and investments. Tendencies of high and volatile inflation lead to confusion and uncertainty. If inflation is high and variable, you may be uncertain about the final cost of the investment you are about to make. On the other hand, inflation may encourage you to increase your savings due to uncertainty about what the future may hold.
However, it may be advisable to shift your finances to material savings, thus investing in entities such as real estate and valuable goods like gold and diamonds. When there is inflation, individuals and households may fear a decrease in their income in the future, thus increasing their tendency to save.
4. Taxation and Government Policies
Paying your taxes and compulsory national insurance policies reduces your disposable income while increasing government revenue and savings. They can affect your private savings and the money you set aside for investment. Additionally, there are various saving channels either subsidized or subjected to taxation.
This significantly affects the interest realized from your savings, which often discourages many people from saving a large portion of their income. Additionally, some government policies discourage investment, such as strict planning legislation. However, some governments offer tax breaks or subsidies to encourage investment within their country.
5. Demographic Factors
Another factor that has a significant effect on an individual’s likelihood of saving a portion of their income or investing it is their age. This tendency can be explained by the life cycle model, where most people retrieve the savings they had accumulated at different rates during their life after retirement. Elderly individuals who have retired from the market tend to save less than the younger working population.
6. Availability of an Adequate Emergency Fund
Before you decide on whether to save or invest your money, it is essential to determine the amount of emergency money available to use when a need arises. Financial experts advise that you should focus on building a reliable savings account first and investing with the surplus cash you have left over. Opening a savings account is a good option because there is less risk involved.
Moreover, you can easily access your money in times of need. For instance, you may need to use your own money when or before filing a personal injury claim due to the existing statute of limitations in ftca cases. The money you put in investments, on the other hand, may increase or increase depending on the daily market changes.
7. Market Forces
The success of an investment is highly dependent on its longevity. This means that if you think you may need to use your money in the short term (two to three years), it is advisable to keep it in a savings account rather than investing it.
The money you invest is subject to the ever-changing market forces, and it may have significantly depreciated by the time you intend to use it. However, long-term goals can allow you to take higher risks because you do not want to use the funds soon.
Before you decide whether you should save or invest your surplus income, it is crucial to consider the above factors. After a careful evaluation, you can then determine the route that will best suit your needs.