The Informed Investor

The Difference Between Investing and Saving

January 1, 2023

Investing and saving are both ways to financially prepare for the future, but they are not interchangeable. While saving refers to putting money away for things like an emergency fund or a goal like a new home or car, investing refers to a long-term strategy with the intent of generating a financial gain. Both investing and saving are important parts of financial security and planning for the future.

Saving Vs. Investing

In general, saving means putting money away, usually in a savings account, to be stored safely until you need it. Having money in savings allows you to be prepared for unexpected expenses and can also be used to save up for big purchases. While saving money is an essential part of your financial health, most saving accounts’ low interest rates mean any interest you earn will likely be outpaced by inflation.

Why Is Investing Important?

While investing has levels of risk that savings does not, the return can be much greater over time. By investing your money, you can make it work for you by potentially earning a return on your investments over time. Some types of investments are riskier than others, but generally, the higher the risk, the higher potential for increased financial gains. The level of risk versus reward for various investments should be carefully evaluated when you develop an investment strategy.

Types of Investments

Investments come in all shapes and sizes, from stocks, bonds, and mutual funds, to owning a home. With stocks, investors buy a stake in a company that they believe will be successful. Bonds earn income by paying regular interest payments to the investor. Mutual funds are a type of investment that is managed by professional portfolio managers who invest in various assets to create a diversified portfolio for investors.

How To Invest Your Money

It’s never too early to start investing your money, as long as you can afford to pay your bills and you have built up an emergency fund in savings. The earlier you start, the more time your money has to grow until it’s time to retire. For example, if you begin investing $5,000 per year in a 401(k) at the age of 25, you should have upwards of $1.65 million in 43 years using an 8% return rate as an example. When investing in stocks, it is critical to thoroughly research the company, and make sure you can afford the risk, before purchasing.

How To Start Investing

If you have a comfortable emergency savings fund and can afford to pay all of your bills, it may be time to consider investing. Employing a prudent investment strategy with the help of a fiduciary investment advisor can help you reach your short and long-term financial goals and may even offer certain tax benefits. If you’re unsure where to start, an experienced financial consultant could be your best investment.

Start Your Investment Journey Today

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