Only some of us know the difference between the two aspects of finances called investing and saving, how they work together and how they should be managed.
The difference between saving and investing is simple. If you need the money soon, let us say in five years or less then save it. If you do not need it for five-ten years or more, then consider an investment. Do not be too tied into the specific amount of years but the need of the goal.
We should engage in both, separately, to secure our financial future.
What is Savings?
As what was mentioned above, savings are for short-term finances. We put our money in places that can easily be accessed. We also want to be guaranteed that we will not lose that money for any reason. Lastly, we want to make sure that there are no penalties or surrender charges, in other words, liquid. There is only one place of course, and that is in the bank.
Although, we should understand that we may not be earning much interest considering that we need our money to be accessible, liquid and safe.
Why do we save?
We save for things that we want soon or in the near future. It could be many different things. One of the most important thing that we should save for is an emergency fund. It could be medical or other kinds of emergency. Then a house, a car and leisure activities depending on your interests.
What is investing?
Investing is a long-term process to build wealth. It is important to know the basic concept of investing before you actually invest into something. There are many possible investments. Two examples are real state and stocks. One important thing we have to understand about investing is the higher the money invested the higher the risk, that is why we should not invest money that we cannot afford.
Why do we invest?
Some common reasons for investing are:
Investing for retirement – this ensures that you will live comfortably in the future. It is a struggle for most people to maintain sufficient resources.
College/education – this might be depending on the period, it could be saved or invested. For college education, usually investing is a better choice.
Invest for investing – This is usually for people who has more resources or more money.
Types of investments
- Stocks- When you buy stocks; you get a part ownership of a company. It is important to find a company that you trust and believe in. Investing in stocks could be very risky as the value changes frequently.
- Mutual funds- In mutual funds, there is a group of investors. A mutual fund manager makes a decision what to buy and sell and when for everyone instead of deciding on your own.
- Exchange Traded Funds (ETFs) – This a new addition to the investment world. Exchange Traded Funds are basically a type of funds that are traded on a stock exchange
While the words saving and investing are sometimes used interchangeably there is quite a difference but both have important roles in building wealth. There is more to know about these two. Speaking to a financial adviser about the best way for both is highly recommended