Saving and growing money (investments) are vital concepts for establishing a strong financial foundation, but they are not synonymous.
The Difference Between Saving and Growing Money
Saving money entails setting aside some funds, but growing money entails investing funds with the long-term purpose of expanding them and achieving a financial goal.
While both options can help you build a more secure financial future, consumers must understand the distinctions and know when to save and when to invest.
Saving Vs. Growing
Although the terms “saving” and “investing” are frequently used interchangeably, there is a distinction to be made. Saving is the act of putting money aside for a rainy day or a future purchase.
Saved money is usually available when you need it and has a low risk of depreciating in value. Savings are often placed in a low-risk bank account.
The Pros and Cons of Saving
Overall, saving has the following advantages:
- Savings accounts inform you how much interest you’ll get on your money upfront.
- While the rates are lower, the Federal Deposit Insurance Corporation covers bank accounts up to $250,000, so you won’t lose any money if you use a savings account.
- Bank products are often fairly liquid, meaning you can obtain your money as quickly as you need it. However, if you wish to access a CD before its maturity date, you may be charged a penalty.
- There are no hidden costs. The only way a savings account at an FDIC-insured bank can lose value is through maintenance fees or Regulation D violation costs (when more than six transactions are made out of a savings account in a month).
- Saving is often simple and straightforward. There is usually no initial investment or learning curve.
Despite its benefits, saving has significant disadvantages, including:
- Returns are low, so you might be able to make more money by investing (but there’s no guarantee you will).
- Because the returns are minimal, your purchasing power may erode over time as inflation eats away at your savings.
Investing or “growing money” entails purchasing assets such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), or real estate with the expectation of a profit.
Investing is similar to saving in that it involves putting money aside for the future, but it involves taking on a larger risk in exchange for a better return.
The Pros and Cons of Investing
There are several advantages to investing your money:
- Stocks, for example, can yield substantially larger returns than savings accounts and CDs. The Standard & Poor’s 500 stock index (S&P 500) returned around 10 percent yearly over time, while the return can vary substantially from year to year.
- Investing products are, on the whole, extremely liquid. On practically any weekday, stocks, bonds, and ETFs can be easily converted into cash.
- If you have a well-diversified stock portfolio, you’ll be able to outperform inflation over time and enhance your spending power easily.
While investing has the potential for better profit, it also has several disadvantages, including:
- Returns are not guaranteed, and you may lose money in the short term as the value of your assets changes.
- You may not get back every dollar you invested, depending on when you sell and the state of the overall economy.
- Allow at least five years for your money to stay in an investing account, so you can hopefully ride out any short-term downturns. In general, you’ll want to keep your investments for as long as possible, which means you won’t be able to access them.
- Because investing can be complicated, you’ll almost certainly require professional assistance unless you have the time and skillset to teach yourself.
- Brokerage accounts may have higher fees. Although many brokers now offer free trades, you may have to pay to trade a stock or fund. You may also need to hire a professional to manage your finances.
How Savings Become Investments
You can start investing once you have a significant amount of funds saved. Investing is how you will start to grow your money and generate wealth.
f you keep all of your savings in a savings account, for example, the amount of interest you get will be minimal. Your rate of return will be higher if you invest in mutual funds or equities.
What’s the big deal? The stock market is volatile, and you can never be sure you’ll make money.
In fact, the stock market can cause you to lose money, so bear that in mind when investing. You’ll ultimately reach a stage where your assets generate more income than you put in each month. At that time, your wealth truly starts to expand.
What Should You Invest In?
It’s critical to spread your risk when you’re first starting to accumulate wealth. Mutual funds are a practical and straightforward approach to diversify your investment portfolio.
These funds are dispersed over various stocks to ensure that you do not lose everything if one firm fails. You should also spread your money over several mutual funds.
You don’t need a large amount to get started; three or four is a decent place to start.
If you feel comfortable investing in individual stocks, diversify your portfolio by investing in a wide range of companies, businesses, and market sectors (for example, don’t put all your money in tech).
It’s not enough to just invest in different companies in the same industry because entire industries can suffer.
You may want to think about investing in something else. Real estate is one example. This can be an excellent source of passive income for you.
However, wait until you are ready to buy in cash and have enough cash flow to cover any repairs or unforeseen bills.
It may also necessitate additional effort on your part, depending on how you rent out the property and whether you utilize a property management company, which can reduce your rental property earnings.
Real estate can be a good investment, but it comes with its own set of hazards. Property values fluctuate, much like the stock market.
In the event of an emergency, you can use some of your assets as collateral for short-term advance loans, such as payday loans. Review the best payday loans online.
Proper Investment Practices
Most financial advisors advise waiting until you have paid off most of your debt before investing.
This, however, is highly dependent on your current interest rate. If your loan has a 0 percent interest rate, it may make more sense to start investing before it is paid off since you will earn a higher percentage of return.
(The stock market’s average annual rate of return is roughly 7 percent).
Before you start investing, it’s also a good idea to have a substantial amount of emergency funds set aside. You should always have money in your emergency fund that is liquid and accessible without incurring a significant penalty.
A safe location to deposit this is in a money market account at your bank.
Investing can assist you in accumulating wealth. However, keep in mind that you won’t develop wealth, or grow your net worth unless you spend less than your earnings and pay off your debt. That’s why sticking to a budget is still a good idea so you can save and invest wisely.
You should also evaluate your objectives, including if they are long-term, short-term, or medium-term:
- Short-term objectives are things you want to do in the next five years, like going on vacation.
- Medium-term goals are plans you want to accomplish in the following five to ten years, such as setting money aside for a down payment on a house.
- Longer-term goals, such as a retirement fund, are ones for which you won’t require the money for at least ten years.
Should You Save or Grow Your Money?
You should decide if saving or investing is the better option for achieving your financial objectives.
Of course, when your objectives and goals change, how and whether you invest, save, or do a combination of the two will most likely alter as well.
Suppose you’re ready to put money into either option but aren’t sure where to begin. Meeting with a qualified financial advisor is an excellent beginning step.
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