Question
Your friend says, "I have some extra money but I'm not sure if should save or invest it." What key questions would you ask your friend to help them figure out what to do?
Answer
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(113 Votes)
Kari
Master · Tutor for 5 years
Answer
To help your friend decide whether to save or invest their extra money, ask them about their financial goals, risk tolerance, time horizon, current financial situation, emergency fund status, expected rates of return, and whether they seek liquidity or growth.
Explanation
To help your friend decide whether to save or invest their extra money, you would need to ask questions that cover several key considerations, including their financial goals, risk tolerance, time horizon, and current financial situation.1. **What are your financial goals?** - Understanding if they have short-term or long-term goals can impact the decision. For instance, saving might be more suitable for short-term goals, while investing could be better for long-term objectives.2. **What is your risk tolerance?** - It's important to know how much risk your friend is willing to take. Savings accounts offer low risk and low returns, whereas investments can offer higher returns but come with higher risk.3. **What is your time horizon?** - Knowing when they need access to the money can affect the decision. If they need the money within a few years, saving might be more appropriate. For a longer horizon, investing might be more effective.4. **What is your current financial situation?** - Assessing their overall financial health, including debt levels, emergency savings, and cash flow, can provide context for the best approach. If they lack an emergency fund, prioritizing savings may be wiser.5. **Do you have an emergency fund?** - Ensuring that there is a safety net in place for unexpected expenses, which typically would be in a savings account, would be a priority before considering investments.6. **What are the expected rates of return?** - Comparing the potential returns from savings (e.g., interest in a savings account) versus potential returns from investments (e.g., stock market) could influence their decision.7. **Are you seeking liquidity or growth?** - Determining if they need quick access to their money (liquidity) or if they are focusing on growing their wealth (growth) will help in making the appropriate choice.