Introduction:
The aim of this article is to explain the difference between saving and investing money, and the different purposes and roles they play in your financial strategy. Saving involves setting aside money in secure and easily accessible accounts, while investing involves purchasing an asset, such as stocks, with the hope of achieving a return. Make sure to understand this fundamental idea before you begin your journey to build wealth and achieve financial independence.
What is the difference between saving and investing?
Saving is the process of setting money aside and placing it in secure accounts. It’s also money that is easily accessible, meaning you can access it in a very short period of time. These types of accounts may include:
- Checking accounts
- Savings accounts
- U.S. Treasury bonds
- Money market accounts
Generally, cash reserves should be readily available when you need them. They should be available for immediate use without significant delay, regardless of what happens around you. Many famous wealthy investors advise keeping a large amount of cash on hand, even if it entails significant losses, as that money is not invested or earning higher returns.
After considering the maintenance of capital, one should worry about the secondary concerns for the money set aside in savings, such as keeping up with inflation.
Investing money is the process of using your capital to purchase an asset that you believe has a good potential to achieve a safe and acceptable rate of return over time. The aim of investment is to make you wealthier, even if you experience fluctuations, possibly for many years. Real investments are generally supported by some safe margin, often in the form of assets or owner profits. The best investments tend to be “productive assets” such as stocks, bonds, and real estate.
How much should you save versus invest?
Saving money should generally take precedence over investing funds. Think of it as the foundation on which your financial house is built. The reason is simple: unless you inherit a large amount, it is savings that will provide you the capital to feed your investments.
If times become tough and you need cash, it is likely you will sell your investments at the worst possible time. And that is not a recipe for achieving wealth.
As a general rule, your financial reserves should be enough to cover all your personal expenses, including mortgage payments, loan payments, insurance costs, utility bills, and food and clothing expenses for at least three to six months. This way, if you lose your job, you will have enough time to adjust your life without the high stress that comes from living paycheck to paycheck.
Any specific purpose in your life that will require a large amount of cash within five years or less should rely on savings rather than investments, as the stock market can be extremely volatile in the short term.
You should start investing only after you have met all these needs (and have health insurance). The only possible exception is putting money into a 401(k) plan at work if your company matches your contributions. Not only will you receive significant tax benefits for putting money into your retirement account, but the matching funds also represent free cash being given to you.
Conclusion:
It may seem overwhelming right now, but every successful person has built their wealth by working hard, spending less than they earn, saving money, and then taking the excess savings and putting them to work.
By learning the tips that help you manage your money with discipline, you can enjoy some of the same rewards of success.
Frequently Asked Questions:
How can I invest money?
You have several options for investing money. If you have an employer that offers a 401(k) plan, that’s a good place to start investing for retirement. If you are saving for retirement on your own, brokers can help you open a traditional or Roth IRA account. If you are looking to invest outside of retirement accounts, look for a brokerage. If you want assistance, you can work with an advisor. There are many brokers that also have robo-advisor services, which can help you find stocks, bonds, mutual funds, and ETFs that fit your interests and investment goals. Look for a brokerage that offers the right level of assistance you need at reasonable fees.
How
Can I start saving?
The best way to build savings is to set money aside regularly, even if it’s small amounts. Create small daily or weekly automatic deposits. Some apps allow rounding up purchases and putting the difference into a savings account. To build your savings even more, set a budget and make sure your expenses are less than your income. Set a savings goal and make sure to put money into savings first before paying any other bills. In other words, pay yourself first.
Sources:
The Balance relies on high-quality sources only, including peer-reviewed studies, to support the facts in our articles. Check out our editorial process to learn more about how we verify facts and maintain the accuracy and reliability of our content.
Source: https://www.thebalancemoney.com/saving-money-vs-investing-money-358062
Leave a Reply