Investing 101: The Difference Between Saving and Investing
When it comes to investing vs. saving, it is important to understand exactly what the difference between the two is. We believe that both are extremely important and serve specific purposes within any financial plan in order to help create balance and fund both short and long-term goals.
Saving is when you put away money for either short-term goals or expenses that you know are going to come up in the next 1-2 years. When you are saving, you are putting the money in a savings account at the bank or a short-term CD that is going to be liquid and there when you need it. Since this money is there for a specific short-term expense, we never want to put it in the stock market. This is because a lot of unpredictability can happen with the stock market within 1-2 years. You don’t want to risk prices taking a drastic dip right when you need that money available.
Investing is utilized mostly to help fund long-term goals, whatever those goals may be. A few common ones are retirement, a beach house, kids education – you get the idea. Because these goals are longer- term, there is more time to weather the volatility of the market. When the inevitable down year in the market does come, as an investor, you don’t need to worry, since this money may not even need to be used for 5, 10, 15 years or longer. With a longer timeline, you can make growth, rather than liquidity, the priority.
With any financial plan, one of, if not the biggest risk is purchasing power erosion caused by inflation. By investing rather than saving and earning a rate of return that hopefully outpaces inflation, you are able to reduce this risk and build out a plan with the goal to make your money last for those long-term goals.
When it comes to saving the money you will need to fund your short-term goals, we almost always suggest just keeping this money as cash in a savings account or money market account. Although the interest is close to nothing on these accounts, the money is safe, liquid and has a certain amount of FDIC insurance attached to it. In other words, this money will be there for you when you need it.
With the money that is going to be invested for the long-term, the question then becomes, “what do we invest in?” If you are just getting started, generally the easiest and best way to invest is in broad diversified mutual funds or ETFs. These are going to provide you exposure to hundreds of different companies and reduce the risk of being invested in just one individual stock. If you participate in your workplace 401k, these are the same type of investments that you hold inside of that.
At the end of the day, your plan needs and should have both savings and investing strategies in it. As we have talked about throughout this blog, which one is appropriate is almost always decided by the time frame in which you will need the money. If the money is needed in the short-term, then that is most always a savings strategy. If the money is for long-term goals, then this is where investing strategies come into play. The best way to get started is to sit down and think about what amount of money you may need in the next 1-2 years. That should then be your savings. Anything beyond that is the money you should look to invest. And remember, for the money that is invested, stick to your plan and don’t constantly buy and sell based on your opinion of what will happen in the near future.
Opinions expressed in this blog are those of the author and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. This material is intended for informational purposes only and is not a recommendation of any kind. Please speak to your financial professional regarding your specific situation. Every type of investment, including mutual funds, involves risk. In addition, there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly. ETF’s are subject to market fluctuations and the risks of their underlying investments. ETF’s are subject to management fees and other expenses.
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