Managing your finances prudently is key to achieving long-term financial security and building wealth over time. Often one of the most critical decisions to make is whether to save or invest. Each strategy has its own range of benefits. Understanding the differences is the first step in making informed decisions about your personal finances.

Clinton Orr is Senior Wealth Advisor and Senior Portfolio Manager at Becker Orr Wealth Management, part of Canaccord Genuity Wealth Management. From his office in Winnipeg, Manitoba, he helps lift clients to financial success, with guidance on financial planning, investing and asset management.

According to the Canadian wealth advisor, whether to save or invest is a common question, one he hears often. This has been especially true in recent months, amid concerns about economic recession, bank stability and the possibility of a correction in equity markets.

Orr emphasizes that the decision on whether to save or invest depends a great deal on individual circumstances. In addition, it’s always important to keep in mind that these are not exclusive strategies — one can and should allocate money to each option.

According to financial advisor Clinton Orr, here are some variables you should consider:

Investing: Maximizing the power of compound growth

Investing involves putting your money to work in several financial instruments ranging from stocks, bonds, mutual funds, real estate, or businesses, with the expectation of generating returns over time.

Benefits include:

Higher returns: Unlike savings accounts, investments have the potential to generate higher returns over the long term. Historically, the stock market has demonstrated consistent growth, outperforming inflation and offering substantial returns for patient investors.

“Investing is an essential tool if you want to grow your wealth over time,” says Orr. “While having a nest egg or emergency fund is very important, investing in your future is equally important.”

Wealth accumulation: Investing enables you to grow your wealth exponentially by taking advantage of compounding returns. Reinvesting dividends or capital gains can further magnify your wealth accumulation.

Diversification: By investing in several assets, you can spread your risk and reduce exposure to market volatility. Diversification can help to mitigate the impact of poor performance in one investment by offsetting it with gains from other investments.

Inflation protection: Investing provides an opportunity to combat the eroding impacts of inflation. By outpacing inflation, investments can help preserve your purchasing power and maintain the value of your wealth.

Of course, it’s equally important to acknowledge the potential risks that come with investing:

“Volatility and market fluctuations can happen,” says Orr. “The value of your investments may go down at times, and sometimes, significantly, in the short term. This exposure to risk can make certain investors nervous.”

Saving: The foundation of financial stability

“Savings, realistically, is setting money aside in low-risk, accessible accounts such as a savings account or in cash,” says Orr. “There’s a lot of great reasons why you should consider saving your money.”

Safety and liquidity: Typically, savings accounts are insured by the government, providing a level of security for your money. These funds are easily accessible, allowing for emergency expenses or unexpected financial obligations.

Stability: Saving is a conservative approach that helps you to maintain financial stability. It provides a buffer for unforeseen circumstances and ensures a safety net during periods of financial uncertainty.

Short-term goals: Saving is ideal for short-term financial goals, such as a down payment for a home, purchasing a car, or planning a nice trip. By diligently saving, you can achieve these goals without exposing your funds to market volatility.

Peace of mind: Having substantial savings can provide you with peace of mind and alleviate financial stress. Knowing you have a cushion to fall back on in times of need can improve your overall well-being.

“When it comes to deciding whether to invest or save your money it’s important to consider your financial goals, time horizon, risk tolerance, and overall state of your finances,” explains Canadian financial advisor Clinton Orr.

“Investing offers the potential for higher returns and wealth accumulation over the long term, but it comes with a certain level of risk. On the other hand, saving can provide stability and liquidity, but its growth potential is limited. Ideally, a balanced approach is usually advisable. Consider checking in with a financial professional to decide which method is best for you.”