Saving is Not the Same as Investing
We commonly hear the words “savings” and “investments” used interchangeably. Sometimes, at the most basic level, that is okay. However, they are not really the same thing. Saving is what we do for the short-term and investing is what we do for the long-term. We should not save long-term; we should invest. Likewise, we should not invest short-term; we should save.
We save money so we can spend it in the near future (vacation, holidays, etc.). We want our money in a very safe place so it will be there for us next week, next month, or next year. This kind of security comes at a cost; it pays us much lower interest. We invest to achieve our long-term goals and objectives, such as retirement, college, and more. We can take on more risk when invest because we expect to earn more interest and we don’t need the money until far into our future. If we lose money in the short term while investing, that is okay, because we know we can make it back up in the long run as our investments recover.
So saving and investing are two related but independent concepts and it’s important to understand both. You could be a very good investor with several rental properties but be unable to pay your bills if you do not save properly. Your savings is the cash you put aside in an extremely safe and easy to get to account. Examples include checking accounts, savings accounts, certificates of deposits, and money market accounts. The first goal of saving is to make sure there is no risk of losing your money. The second goal is to earn enough interest to simply keep pace with inflation, if possible. Saving is not about making money; it’s about safety.
Investing is when we put money into an account or buy an asset that is reasonably safe and will pay us an acceptable amount of interest over time. We want our investments to make us wealthier over time. Investments are things like mutual funds and real estate. Investing involves assuming some risk, such as a downturn in the financial market. However, when done right, good investing will smooth out those dips so that we have money to retire on or to pay for our child’s college education.
The real key to successful saving and investing is to match our financial goals to the right types of savings and investing accounts. For instance, the stock market is an excellent means for long-term investments. Over long periods of time, say more than five years, the stock market pays us more interest on our money than any other investment. However, it historically has experienced short-term drops in value, with the value of our investment fluctuating up and down each year. We would not want to put our emergency fund dollars in a stock market account. A short-term drop in the market could result in our money not being there when we need it.