Colin Ely says he doesn’t keep much in savings. Instead, he’s “aggressively invested in index funds.” The recent selloff in stocks has made him more reluctant to pull his money out—and potentially take a loss on his investments. But, if he finds “the right real estate deal” in the greater Philadelphia area, he’s willing to hit the proverbial “sell” button to make his dream a reality.
For the 31-year-old, the answer to the timeless money question—whether to save or invest—is straightforward, but for many it’s not so clearcut.
Still, like Ely, a majority of Americans are now prioritizing long-term financial goals, according to a recent study by Fidelity Investments. Among actively investing U.S. adults surveyed, 63% have changed their investing habits in some way since the start of the COVID-19 pandemic.
And yet, this year hasn’t been so kind to investors, as the S&P 500 slumped about 19% at its worst, and is now down more than 13% for the year. Savers, meanwhile, are being rewarded by a slight uptick in interest rates—and rates are projected to reach pre-Great Recession levels by year-end as the Federal Reserve scrambles to quickly ratchet up a benchmark rate to quell inflation that hit a 40-year high earlier this year. These factors have made the save-versus-invest dilemma trickier this year.
“This is the first time that many people have experienced real inflation,” says Kathy Carey, director of research for Baird’s Private Wealth Management group. This dynamic has prompted more questions from clients who want to “make sure they’re in the right,” she says, though Baird advisers are largely doling out the same advice as always by first asking clients: “What do you need that cash for?”
Having a clear goal in mind—like Ely’s goal to buy real estate—is important because then you can create a successful strategy to get there, adds Amy Richardson, a certified financial planner with Schwab Intelligent Portfolios Premium. That’s why, she says, the question of whether to prioritize saving or investing right now yields answers that are so specific and unique to a person’s financial situation. “There’s gray area, and that’s why I love what I do.”
Richardson encourages people to navigate money decisions based on which bucket a financial goal falls into: Short-term goals for the next two years typically emphasize saving, while medium-term goals up to about five years out open up more opportunities for investing, and long-term goals for decades down the road heavily favor investing.
Investors and savers alike have more intriguing options for their money now. Interest rates are starting to go up after being at near-zero for the past two years, and the Federal Reserve adjusted a key interest rate to a range of 0.75% to 1% in early May. As a result, people focused on short-term goals will find better rates on savings accounts, certificates of deposit (CDs) and even savings bonds. Meanwhile, the market’s selloff could present an opportunity to buy stocks at cheaper prices.
That said, both Richardson and Carey advise considering the saving-versus-investing question in the context of your longer-term financial plan to avoid making any knee jerk reactions based on short-term dynamics. “By having that outline and knowing what you’re working toward, you can avoid the noise and stay the course,” Richardson says.
She adds that “tried-and-true” advice still holds, including the value of budgeting, building up an emergency savings fund, diversifying your portfolio, and crafting a financial plan that you can stick with over time. “It really is the same advice we’ve given all along.”