Saving Vs. Investing (And Why You Need to do BOTH)
For many people, the concepts of saving and investing seem like they’re pretty much the same thing.
- They both have to do with money. Money you don’t get to spend today.
- They’re both something we know we should be doing… but we often struggle to make them happen.
- And they’re both supposed to make the future more secure.
But there are significant differences between saving and investing. The biggest difference is this:
Savings are usually used for short-term goals, such as making a major purchase or putting money aside for an emergency fund. Investing is usually a longer-term activity, focused on building wealth or preparing for retirement.
The way you think about saving and investing will differ depending on where you are in your financial journey.
What is Saving?
Saving is a fairly straightforward concept. Basically, you’re putting money aside for an expense you see coming in the future. In most cases, that expense or need isn’t years away; you may be planning to pay for a vacation or buy a new car.
In general, savings is in the form of cash. That way, you’re able to access it immediately. When you’re ready to spend it, or when the need arises
When you’re saving, you can put the money in a low-risk account like a savings account or certificate of deposit, or CD. Many people consider a CD to be an investment, but they technically fall under the savings category.
You could put cash into a coffee can, but that’s not recommended. It’s not very safe and you won’t earn any interest while it’s sitting there.
What is Investing?
Investing is all about making your money work for you. When you’re saving, you accumulate money by putting it into your account. There’s a small amount of growth coming from interest, but these days, that number is usually very small.
Investing is different. The activity is designed to make your money grow, especially over the long term. Stocks, bonds, mutual funds, and exchange-traded funds (ETFs) enable the investor to own something that can become substantially more valuable over time.
There are also risks that come along with investing. There’s a chance any investment can decrease in value. In some instances, an investment can become worthless and investors lose 100% of the money they put into it.
In most cases, though, investing in stocks and mutual funds with a longer-term perspective delivers positive growth.
“Should I Save or Should I Invest?”
With few exceptions, everyone should be saving – or at least making the effort. It’s a good idea to put a percentage of your income into some sort of savings automatically. This protects you from frivolous spending, ensures you have cash available in case of emergency, or if an opportunity arises you’d like to be able to take advantage of.
Have you ever met someone who regretted having too much money in the bank?
It’s also important to start investing as early as possible. Why? Because the most powerful benefit of investing is compound interest. The sooner you get started, the more time your money has to grow – and you may be shocked to see how fast that growth happens once it gets going.
Earlier in life, you can be more aggressive in your investing, taking on a little more risk for the possibilities of bigger gains. Later in life, it usually makes sense to be more conservative. You want to minimize the risk of loss, even if it means less growth.
No matter what stage of life you’re in, your financial future is in your hands. You’re the one responsible for building that future; saving and investing are the tools of the trade.
If you’re not already doing it, make plans to start saving AND investing. Then, take the necessary action steps to put those plans into practice.
Freeman Capital is here to help.
Freeman Capital Advisors is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.