Saving vs. Investing - What's The Difference?
Updated: Jan 9
We hear saving and investing used together so much, you may think they are the same thing. And while they do have a similar purpose - to prepare and protect your future - they are very different.
Let’s start with savings. Savings are for short term purchases and emergencies. This is money that you’ll need within four years OR money that you don’t know when you’ll need. There shouldn’t be a risk (think penalties and fees) associated with getting this money, it should be there when you need it. You may have multiple types of savings, or multiple accounts for different purposes. That’s ok - as long as you are clear on what and when the money should be used and you stick to those purposes.
Investing is putting money at risk for a long period of time in exchange for the opportunity to earn greater rewards. The key phrases here are: risk and reward. In investing, the risk could be the risk of the money not being available when you need it, or the risk could be fees that are associated with claiming your money. (This should not be a risk, but in bad, terrible investments like life insurance, it could be.) More likely, the risk is associated with the underlying asset, or the thing that you are invested in.
Let’s take stocks, which represent ownership in a company. If the value of that company decreases (like if the CEO goes to jail), then your investment loses value (the money that your ownership share is worth). On the other hand, if the company’s creates something new and awesome (like the very first iPhone) and the value of that company increases, then the value of your investment also goes up - that’s the reward. You have an opportunity to earn more rewards, based on the level of risk that you’re willing to undertake. Investing is a careful balance of how much risk you’re willing bear, compared to the amount of reward that you’d like to earn. There are tons of ways to “invest” and some are very, very good and some, not so much. In most cases, however, investing is a long-term endeavor and should not be done with money that might be needed in the near future.
Now - here are a few things to take away from this:
Life insurance is not an investment. (No that wasn’t the take-away, I just like to reiterate that when I can).
Seriously, the takeaways are:
Your finances should contain some level of savings for emergencies, expenses and purchases that you intend to have within the next 5 years.
Your finances should contain some level of investment for wealth building and long-term financial goals.
The level of savings that you maintain is related to your short term goals and personal conditions.
The level of investments that you maintain is related to your long term goals and sensitivity to risk.
I hope this helped answer some of your questions about saving and investing. If you'd like to learn more (free) personal finance tips, join our Empower Community on Facebook. If you'd like more help getting your finances in order, take a Face Your Finances online class or join us for a live webinar! See you soon!