Should you save or invest?

When it comes to putting money aside, you may be wondering whether it is better to save that money or to invest it? While there are no hard and fast rules when it comes to saving and investing, there is a combination of the two that should work for almost anyone.

Save a little

When you find yourself in the position to put a little money aside each month, the first thing you should do is set up an emergency fund. An emergency fund is a small savings fund that you keep on your current account or on a savings account, which you can easily access if an unexpected expense comes up.

While personal finance experts cannot seem to agree on the amount this fund should contain, the general range is as little as $1,000 and as much as three months of your salary.

However much you decide to put aside as savings for emergencies is fundamentally up to you, but it should be enough to cover unforeseen expenditure such as a home repair or a medical bill not covered by insurance.

Invest a lot

Once you have a small savings fund, any money you can put aside after that should go into investments. The interest you receive on simple savings accounts is not near enough to see your wealth grow over time. Hence, it is best to put your excess funds into promising investment assets such as stocks, mutual funds, and real estate that can generate over five percent average annual return.

According to a report by Russell Investments, the best-performing asset classes in the past ten years in Australia have been residential property (8.1 percent), currency-hedged global bonds (7.5 percent), Australian bonds (6.1 percent), and currency-hedged global shares (5.5 percent).

Using your excess cash to invest in a portfolio composed of a mix of these asset classes will very likely yield you substantially more returns that the interest you would receive in a savings account and would be an excellent formula to build wealth over time.