Now That You're Making The Big Bucks, Should You Save Or Invest?

A new generation of Millennials is graduating from college and entering the workforce in one of the most difficult investing environments in history. If you now find yourself with excess cash for the first time in history, deciding whether to invest or save is a tough decision these days. Interest rates are at record lows and stock prices are at record highs. So what should you do with your extra cash?

As most people know, saving money involves setting aside cold, hard cash in a savings account or checking account. Since most of these accounts are insured by the FDIC, they are about the safest place you can put extra cash. However, if you’re looking to use your extra money to earn income, the interest rates on savings accounts is typically well below 1.0 percent, which is extremely low.

The alternative to saving is investing. When you invest, you use your cash to buy assets that you believe will increase in value over time. The idea is to use your extra money to earn even more money. The assets you buy can range from stocks to bonds to real estate.

There are plenty of pros to both saving and investing. If you save your money, you will always have quick access to your cash, and you can sleep easy at night knowing that your hard-earned money is safe.

Investing Over Different Time Spans

However, if you invest your money in a smart way, you could be using your money to make more money and help you reach your long-term financial goals, such as retirement.

Related Link: Now Is The Time To Determine The 'Uncle Point' Of Your Portfolio

If you’re trying to decide what to do with your extra cash, here are some things to consider. If you think you’ll need access to your money within the next one to two years to make a down-payment on a house or buy a new car, it may be better to simply save or invest in a short-term certificate of deposit (CD). According to Bankrate, the national average interest rate for one-year CDs is currently only 0.29 percent.

If you would like higher returns than 0.29 percent, but still don’t want to risk losing a significant portion of your investment in the medium term, investing in bonds could be the right choice for you.

Finally, if you are willing to invest in an asset for at least five years, the stock market has historically generated substantial long-term returns. However, make sure you are mentally and financially prepared for significant stock market gains and losses in the short term.

One last thing to consider is whether or not you have any outstanding debt, including student loans, car loans, a mortgage and especially credit card debt. If so, it’s likely that it would be difficult for you to generate higher returns on your extra cash than you are paying in interest on your debt.

In other words, it’s almost always a good idea to pay off your debts before you consider saving or investing. And remember, always pay off debts with the highest interest rates first (typically credit card debt), even if it is not your largest debt.

Original publication: August 1, 2016