Although the terms “saving” and “investing” are sometimes used interchangeably, they are two unique concepts. It is important to understand the difference between them and to know your needs for each. If you want to secure your future finances, it’s highly recommended that you should be engaged in both, separately.
Saving vs. Investing : Understanding the Difference
Saving involves storing up of funds on a regular basis and keeping them safe by using financial products that are secured and accessible anytime. When you “save”, you prioritize the protection and preservation of your money from loss.
A few example methods of saving include the classic piggy bank, bank savings accounts, checking accounts, and short-term time deposits or also known as certificates of deposit. Although they offer zero to very minimal interest rates, the risk of losing your funds is also very small.
The most common advantage of saving is that you will be able to withdraw your money whenever you need or want to. In general, building a savings account is ideal for short-term goals and emergency purposes.
Investing, on the other hand, is a long-term commitment of putting away money and letting it grow. Investing brings greater risks of loss compared to saving, but it also offers a greater potential for better financial rewards.
Simply put, you take a bigger risk for a larger return when you invest, but there is a possibility that you will lose all your funds. Because of this, investing is definitely not for the faint of heart. Investing is best for long-term financial goals. When you invest, make sure that you only use the funds that you won’t need anytime soon.
Some investment products allow you to withdraw even before its maturity. However, doing this means you should be willing to pay for early withdrawal penalties, absorb losses, and accept the lost opportunity for potential gains.
Understanding Your Financial Goals
It’s important to review and understand your financial goals before making a decision on whether to save or invest. When done incorrectly, it could cost a lot of money on fees or loss of potential income.
When to save?
You should save for planned purchases. You should also have a separate savings for emergencies. You can also save for that upcoming vacation, or for a down-payment for your car or home loan. You save to ensure that you have secured funds for use whenever the need arises.
But remember, although savings are usually safe, doing this long-term may cost you a loss in value of your money due to inflation, since savings don’t really make your money grow to beat the regular inflation rates.
When to invest?
For long-term financial goals, such as your little children’s college fund or your retirement fund, investing is the best option to choose.
When investing, it is important to know how to invest wisely. It’s also essential to choose the right investment vehicle for the kind of risks that you are willing to take. Through this, you can make financial planning work best for you.
“They say the best time to invest was several years ago. The next best time is today.”
When you start investing early and regularly, there is a better potential for greater returns. Investing is making your money work for you, because the potential for growth is larger compared to saving, which is just putting away money without really making it grow.
Time is of the essence when it comes to investing. This is due to the concept of compounding.
What is compounding?
Compounding is the process of generating more return on an asset’s reinvested earnings. This works using the reinvested earnings and the amount of time your money stays in the investment account.
Compound interest makes your initial investment grow exponentially. This is why it is really best to start investing as early as possible, especially while you are still young and just started earning. Starting early means you only need a lesser initial investment to reach the same goal compared to those who start late. By letting your money sit in the right investment account, you are giving your money more time to work and grow for you.
Understand the risks
Fear of taking risks is one of the greatest enemies that make unsuccessful investors. Others are quick to withdraw their investments when the market is not doing good, not taking into consideration that it’s just a matter of time for the market to recover and move towards an uptrend direction.
When it comes to investing, it’s important to understand the risks, but do not let fear dictate your strategies.
Do not put all your eggs in one basket
Though investments offer better returns despite the risks, investing all your extra funds is definitely not a good idea. When unexpected events arise, such as a sudden downturn of your income, a job loss, or a family member getting sick, you will have to pull your funds out of your investment despite the status of the market. And if the timing is not right, this would make you absorb losses, shoulder charges, and lose potential gains.
To become more financially independent, it is strongly recommended to build both your savings and investment accounts. Ideally, you should start building an emergency fund first before you begin investing. This way, you are financially ready in case unexpected, unpleasant life events happen.
Both saving and investing are equally important. Each has its own use and purpose, and it’s best to have both.