Risk vs. Reward: When to Save and When to Invest

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investment risk

There are risk takers in the world, and there are those who play it safe. The extreme risk takers - the ones jumping off the cliffs into the ocean during summer vacation and the ones throwing thousands of dollars into the stock market on any given day - can have days with big payoffs. But they’re also subject to the biggest losses. The safer folks don’t tend to stick their necks out in risky situations. But while they may not get hurt or lose any money in the process, they don’t get to reap the rewards of their riskier counterparts.

There’s a happy medium between the extreme risk taker and the super conservative. And when it comes to money, the decision usually involves whether to save or whether to invest. If you have extra money and you’re not quite sure the risk vs. reward of your investing options, keep the following in mind:

Do you need access to your cash soon? If you’re saving up for something in the short-term - like a vacation or a new car - you may want to keep you money in a savings account. Chances are that you’ll want to have easy access to that money and you don’t want to risk any short-term market fluctuations. And even in the short-term, you may still earn a little bit of interest on your account.

Is your money working for you? Squirreling away a lot of money in a savings account can feel really comforting - but it’s hardly going to produce any significant returns. Every single dollar you have should be put to work, which means making sure that you get the biggest bang for you buck and you earn a return on some of the money you have stashed away. If you’re worried about the risk of investing your money, consider putting it into a low-cost index fund or mutual fund.

Do you have a balanced portfolio? How risky are you really? This includes money in your savings accounts, retirement portfolio, mutual funds or index funds and individual stocks. Take stock (no pun intended) on what level of risk you’re currently operating with and decide if that matches your needs and your risk tolerance.

About Stephanie Halligan

Stephanie is the founder of The Empowered Dollar, a site dedicated to helping millennials to fix their finances and find their stride in money and life. When she's not blogging, Stephanie is designing school curricula and online games to teach students about smart money management.

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