The Difference Between Investing and Savings
While some might consider these words synonyms, investing and saving have very different implications. How much of each you should do is often a little different for everyone depending on financial goals, state of current finances, or how big of a risk-taker you are. If one thing’s for sure, knowing when to employ which strategy can have a big impact on your financials.
When to Save
Think of saving as something that applies to short-term goals. Having a holiday spending account, saving for a trip or a new car, things on which you would probably spend the money in three years or so. The funds are accessible for your to spend or use in a different manner in the event of an emergency. While most savings accounts don’t have particularly high interest rates, that’s the trade-off to knowing how much money you have without market fluctuations affecting it.
Research checking accounts, savings accounts, and short-term certificates of deposits (CDs) to house your savings. Make sure you review the withdrawal terms and conditions to avoid penalties or fees when you’re ready to spend.
When to Invest
A good rule of thumb for investing is planning to use the money for something at least five years into the future. Retirement. A child’s college fund. These sorts of long-term financial goals toward which you are building, and wouldn’t necessarily want to have sitting around in a checking or savings account. Investing allows you to play the waiting game and see returns on your money. There are more elements of risk that go into investing versus regular savings. The extended timeframe before withdrawal should allow for those risks and rewards to even out in your favor. But know that this money won’t be easily accessible for emergencies or snap decision purchases. It takes time to see returns. If you think you might want the money sooner than later, you might wind up losing money by pulling out of an investment strategy too early.
Investments can take different forms. Basically, you’re buying an asset you believe will return gains over time. Stocks, mutual funds, and things like that are popular options for investments. You can also look into more tangible things, like real estate. But no investment opportunities are 100% risk free. Do your research or turn to a trusted advisor for help.
Here’s Why You Should Do Both
In short: invest for the long-term, save for the short-term. It’s easy to say, but not always so easy to implement.
Start by defining your goals. Do you know that you want to buy a new car? Or want to take a big vacation? Need to start an emergency fund account? Create a savings account and start depositing small amounts every paycheck.
Start defining your goals!
Do you need to start saving for retirement? Want to open your own business? For those larger goals, figure out a workable investment strategy. It should be something for which you’re willing to risk safety in exchange for the growth potential. And if you have questions, find a financial advisor who can help guide the way.
What are your thoughts on when to save and when to invest? Share with us in the comment box below!
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