How to decide when it’s time to save or invest, according to 3 financial planners

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There’s one rule many financial planners seem to stand by: If you don’t have any savings, then you probably shouldn’t invest right now.

Saving is an act of preserving your money you’re making sure cash is there when you need to be rescued from a financial emergency or fund a big purchase.

Investing is a growth strategy. It’s meant to help you grow any additional money you have now into more for the future. Investing requires taking on some risk, but it’s key to building wealth in the long term.

Depending on your financial situation, saving versus investing might feel like an either/or decision if you’re wondering where to put your next dollar. Here’s what three financial planners say you should consider if you don’t know which to prioritize.

If you’re not prepared for an unexpected expense, focus on savings

“We recommend keeping three to six months’ worth of cash in savings,” said Philip Olson, certified financial planner and cofounder of the Art of Finance.

“This is a higher priority than investing, because it serves as a kind of ‘insurance’ when life throws you curveballs. So if you’re living paycheck to paycheck, that’s a clear sign that you should save any extra money,” he said.

“If you’re not sure how much you need to save and keep as cash in an emergency fund, then track your expenses for a few months to see how much your life really costs,” said Phuong Luong, certified financial planner and founder of Just Wealth.

Luong also recommends aiming for at least three months’ worth of expenses in cash, and potentially more if you’re self-employed or support other people financially.

Pay off high-interest debt before investing

Cait Howerton, certified financial planner and a senior financial coach at SmartPath, uses the 7-Tank System to help people earning an income decide which financial priority to tackle next.

“We recommend focusing all efforts on filling one tank at a time. All of your extra cash flow, or fuel, should go to the tank that you’re working on until it’s full, or finished. Then, move to the next. We recommend that a three-to-six month emergency fund is saved for and that all bad debt is paid off before migrating towards investing,” Howerton said.

But, there is an exception. If your company offers to match your retirement contributions, take advantage of it, Howerton advises. Once you’re contributing enough to score the match and start investing that money for retirement, move on to building at least a one-month emergency fund, she said.

Make a timeline to figure out which goals to save for and which to invest for

If you’re able to cover all of your monthly expenses including debt payments and have a sufficient emergency fund, it’s time to think about your larger goals, Luong said.

You can shore up money in a savings account for any goal, but investing it could help you get there quicker and accumulate more money. But timing is crucial. Investing in the stock market is generally only appropriate for long-term goals.

“If you’re saving for a major purchase or event within the next five years like saving up for a down payment on a home, wedding costs, grad school, or starting a small business then, I typically don’t advise investing that money in the stock market ,” Luong said.

Money you need to fund short-term goals should be set aside in a low-or no-risk account. “It’s best to save it as cash in a high-yield savings account so you can at least get some interest from it beyond what you’d get from your checking or regular savings account,” Luong said.

As Olson put it, “one of the biggest advantages” of only investing for long-term goals is that “if your investment drops in value, you’ve got the luxury to be able to wait for it to recover in value before you sell it. Cash savings buys you time, and allows you flexibility.”

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