Investment and savings are very crucial concepts in financial management. Both concepts are good to lay a solid financial foundation.
However, they aren’t the same. You would need to understand both concepts and use them simultaneously to make your financial future more comfortable. But it’s more important that you know the difference between saving and investing. This will help you to determine the best time to save or invest your money.
The big difference between these two is how much risk is involved. There’s no risk involved when you save, but it means you will get a meager return. In contrast, you have the opportunity to make a far higher return when you invest, but you have to live with the risk of losing your money.
If you’re going to build long-term wealth, you need to use these strategies, but you need an in-depth knowledge of both.
1. Understanding Saving and Investing
When you put money away to meet a future need, that’s saving. In saving your money, you’re going to have it available to you relatively quickly so you can use it when you need it. This doesn’t mean that you can’t use it to save for longer-term as well. It is simply you keeping the money for future use and making sure that it’s available when you need it.
Typically, savers deposit their money in low-risk bank accounts. However, if you want to maximize your earnings, you should go for a savings account with a high annual percentage yield if you can meet the minimum requirement.
There are similarities between investing and saving because, in both cases, you’re putting your money away from you for future use. However, with investing, you’re looking for higher returns that tally with the level of risk that you’re taking. According to the research paper writing service, some typical investments are stocks, exchange-traded funds, mutual funds, and bonds. You’ll need a brokerage account before you can buy or sell them.
Before you decide to invest your money, you have to consider that you’re putting your money away for a minimum of five years. When you invest over a shorter while, your investment is usually very volatile, and it’s easier for you to lose your money. This is why you shouldn’t invest the money you will need immediately or within two years.
2. Similarities between Investing and Saving Money
There are different features involved in investing and saving money, but they share the same goal. They are strategies that allow you to accumulate money over time, and the common thing is that you’re putting your money away from you for future purposes.
According to an essay writing service, you’ll need a specialized account with a bank or other financial institutions before you can accumulate money. For example, if you’re saving, you have to open an account with Credit Union or Citibank bank. But if you’re investing, then you have to open an account with independent brokers.
However, it’s now common for banks to have their brokerage arms too. Some of the most popular investment brokers are TD Ameritrade, Fidelity, and Charles Schwab. There are also online options such as E-Trade.
Whether you’re a saver or an investor, you’ll realize that it’s essential to save money. Before you commit yourself to invest money for long-term investments, you must make sure that you have more than enough funds to take care of your expenses and cover unexpected costs and emergencies.
When you invest, ensure that it isn’t money that you need immediately or anytime soon. Invest only funds that you can spare for a long time to plan your future but make sure you have enough to take care of the present.
3. Investing or Saving – which is better?
Neither of them is the better option in all situations. The better one at any point will depend on the situation at hand, especially your financial position. To determine the better one for you, use these rules of thumb to determine:
- If you’re going to use the money for an emergency or anything within a year, it would be better to save the money.
- If you’re not going to use the money within five years and can also withstand a capital loss within a short period, it might be better to invest the money.
For instance, if you’re going to pay your child’s tuition in a year, then you can save for it. If you were to make any other choice, like investing in the stock market at the time, then you’ll be gambling with your child’s tuition, not investing or saving. It would be best if you did the same for emergency funds. Keep it in savings, not invest it. This will come in handy for you if you experience an illness or have other issues to deal with. Monies like that serve as a cushion for life and death situations and shouldn’t be invested.
The time to invest is when you have money that you have long-term plans for. Money that you want to grow over time. You can invest it in mutual funds, exchange-traded funds, or the stock market, depending on how much risk you can tolerate. The longer you can keep your money in an investment, the longer the time you have to beat the ups and downs that come with the financial market investment. As stated on the write my essay platform, you should only invest when you have a long-term vision for your money and don’t have to access it anytime soon.
Saving and investing have their common grounds, but they are pretty different. If you’re going to invest in the stock market, make sure it’s money that you won’t use for at least five years. Otherwise, you would be better off saving such money.