What’s the Difference Between Saving and Investing
Saving and investing are related, in that they are methods by which you put money aside for later, but they are different from each other. Both are important to your financial health and security, both now and in the future.
Saving and investing differences explained
Saving keeps your money safe and liquid
When you "save" money, you put your money aside in safe and liquid financial accounts, such as interest-bearing checking or savings accounts.
These accounts are safe because they are often FDIC insured, which means your money is protected against loss. The standard deposit insurance amount is $250,000 per depositor, per FDIC-insured bank, per ownership category, and you can access it instantly.
Saving's first priority is capital preservation
It's not to provide a significant return on investment over time. Although at one time, savings vehicles did often provide relatively robust interest earnings; today those earnings are modest.
Think about this, how many millionaires do you know who have become wealthy by investing in savings accounts?
Investing
Investing's first priority is wealth accrual over time.
While savings are for immediate use, investing is meant to create wealth over the long-term.
With investing, you put your money into investment vehicles that you think will provide an adequate return over time, such that you become wealthier as your investments grow. Investments often have greater risks -- but promise greater returns -- than savings.
Investments are much riskier than savings, in that there are no absolute guarantees of protection, but the promise of return on investment is also greater. The key to optimal investing is to understand the markets, be fully aware of the risks and be mindful of your appetite for risk.
You should both save AND invest
Both savings and investments are important. Savings should come first since you'll need a nest egg for emergencies and to use as a foundation for your financial future.
How much should you save? If applicable, there are two types of savings funds you should have. You should have an emergency fund and a "large purchase" fund:
Your emergency fund should provide you enough to live on for two years.
Generally, you should have enough liquid savings in your emergency fund to cover all of your personal expenses including mortgage or rent, loan payments, utilities, food, and other necessities for at least two years.
If you lose your job, get sick or become disabled have an emergency, you'll be able to cover those expenses.
Your large purchase fund should give you the cash to make a planned-for large purchase in five years or less
Although you could conceivably use an investment vehicle for this, investments can be extremely volatile and can lose value very quickly.
Because of that, any money needed for a large purchase (such as a house down payment) in the next five years or sooner should be in savings.
How much should you invest?
Once you have your savings funds in place, it's time to invest. How much should you invest? A good rule of thumb is that you should invest at least 10% of your income a year, although 15 or even 20% is better.
And by all means, if your employer offers a 401(k) with matching contributions, take advantage and max it out. That's free money in the bank for retirement.
Advantages of investing
Let's say you save $100 a month and you put it in a savings account. You're earning basically zero interest on that. At the end of a year, you still have $100. Inflation's gone up, so you actually have $98 or something like that.
If you put it in the market and say you'll earn 5%, that $100 at the end of that year becomes $105. And then the $105 plus another 5% the next year, and so on. Over the course of 30 years, that becomes a much larger sum of money.
Women are going to live, on average, to be about 92 years old. You want to make sure your money is working hard for you.
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