Saving and investing are two important financial strategies that can help you build a solid foundation for your future. They aren’t exactly the same, however, and it’s crucial to understand the four main differences between them.
Investing involves purchasing assets with an expectation that they will earn significant returns over time and ultimately grow wealth. This usually requires long-term commitments and market research.
1. Savings are for short-term needs
Whether you’re saving for an emergency, vacation, home repairs or a wedding, savings are a great place to keep money that you don’t need to access in the immediate future. Keeping your short-term goals separate from your everyday spending cash allows you to avoid overspending and maintain discipline.
There are many different kinds of accounts to choose from, including those that offer safety, liquidity and interest-earning potential. These types of accounts can help you reach your savings goals and grow them over time.
To begin, set a goal for the amount of savings you’d like to have at the end of each month. Then, pay yourself first by allocating a portion of your paycheck to save, rather than spending it all on expenses.
2. Investing is for long-term goals
Investing is a strategy for building a portfolio of securities, such as stocks and bonds. It can help you achieve long-term financial goals, such as retirement or saving for a child’s education.
Taking a longer-term perspective can help you avoid making short-term decisions that may not be in your best interest. You can also feel less emotional when investing, which may make it easier to weigh risk versus reward.
A good way to start is by dividing your savings into three buckets based on the time horizon for each goal. For example, money you expect to need within two years should be protected from market volatility by investing in high-yield savings accounts or certificates of deposit (CDs).
3. Investing involves risk
When you invest, you’re buying an asset (like stocks or bonds) that you expect will increase in value or earn income. It’s a risky activity, so it’s important to have a good understanding of how risk and reward work before you make an investment decision.
In general, the more risk you’re willing to accept, the higher the potential return will be on your investments. But there’s a tradeoff between risk and return, and each investor must consider their goals, time horizon, liquidity needs, and risk tolerance before making an investment.
When you invest, there are a variety of risks that can affect your portfolio, including market risk, corporate risk, and international risk. Inflation risk can also impact your investments, as it can reduce the value of your savings over time.
4. Investing requires time
While saving is a simple way to put money aside for a specific goal, investing can be a little more complicated. It involves buying assets that might increase in value, like stocks or property, with the hope of making more money in the long run.
Investing requires time and can be risky, but it’s also one of the best ways to build wealth over the long term. If you are new to investing, it is important to understand the risks and costs before making an investment decision.
Investing can be the key to reaching long-term financial goals, such as retirement or paying for college. Investing in stocks is particularly ideal for those looking to build wealth over a long period of time, as the average annual growth of stock market returns is 7% after inflation.