May 28th, 2017
Most of us have heard the terms,“saving” and “investing” at one point or another. These terms are often referred to in the context of a financial conversation. Much like myself, you may have heard these terms as a child while listening in on adult conversation. As an adult however, I still found myself needing some clarification on the differences between the two. Over the years, I have learned that they are two uniquely separate concepts. And furthermore, getting a better understanding of the differences between savings and investing can be extremely valuable in promoting your financial well-being.
The word “saving” often brings to mind the act of putting money aside for the future…which is absolutely correct. By definition it is income not spent or as economic theory refers to it, “deferred consumption.” It is also important to note that “saving” differs from “savings.” Saving refers to the act of increasing one’s assets, whereas “savings” refers to one part of one’s assets (such as a CD or savings account). Some examples of saving methods include bank insured deposit accounts, such as savings and money market accounts, and non-bank insured accounts such as mutual funds. And, of course, there are other types of unconventional saving methods such as, saving or investment clubs. The key is to find a method that is most suitable to you. One of the key differences between saving and investing is that savings tends to help prepare you for unforeseen and future expenses such as emergencies, college expenses, a down payment on a car or new home. This is primarily why savings needs to be fairly liquid. Many financial experts such as Dave Ramsey, recommend that households have an emergency fund of between 3-6 months worth of household expenses saved to deal with household emergencies. As we all know – life happens. Having an emergency fund also helps to ensure that you’re not dipping into your general savings or other long term assets.
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The concept of investing involves more than just putting money aside for future expenses. It has direct impact on your long term financial goals. Investing is the step by step strategic process you engage to manage and maximize the assets you have acquired over your life. It takes into consideration a high level of insight and discipline when it comes to debt reduction, retirement planning, tax planning, wealth accumulation and personal interests. In sum, it is a key step in securing your personal legacy. Many experts refer to investing as the vehicle that, “allows your assets to work for you.” Although there are literally hundreds of ways in which to invest, having a clear understanding of your investment goals is critical to any investment strategy. Investing, is not always about money. For example, it can be viewed in the context of managing your time, getting an education, self-development, or even starting a business. The thing to remember is that investing is about maximizing your financial viability for the long haul. That said, learn to be patient and disciplined. Don’t be in a hurry. Follow your strategic plan, and be consistent as you work to achieve your investment goals.