Saving and investing are essential to financial management. While everyone can save but not everyone can invest, both are crucial moves for those who wish to achieve financial stability and ultimately, financial independence. That way, you’ll only need to borrow from a licensed money lender if you want to build more wealth.
Surely, you wish to be financially stable and independent. Thus, it pays to learn the difference between saving and investing, their pros and cons, and when to resort to either option.
Table of Contents
Savings
Saving regularly is an important part of financial planning. After all, you need sizable amounts of money for either emergency expenses or goals such as a car, a down payment for a house, business capital, or investment.
These days, saving means depositing your money in a savings account. Stashing cash at home is not only archaic but also unsecure, as it can be physically stolen. Thankfully, savings accounts are easy to open, have low fees, and come in different kinds.
There’s the standard savings account, which allows you to withdraw anytime and access your money from any device with an internet connection, but they usually have lower interest rates. Then there’s the high savings account, which provides higher rates but may have withdrawal limitations.
Investing
Saving is a good thing, but it’s not a means of growing money. After all, money itself loses value over time because of inflation, while the price of goods increases. For that, there’s investing, wherein you use your money to buy assets—bonds, stocks, real estate, jewelry, and many others—whose value grows over time.
That, however, is how things should go ideally. In reality, there is no guarantee that these assets will become more valuable over time, which is why investments involve risks that could lead to loss. So if you plan to invest, you must know which type of investment asset will yield returns.
At the same time, you should also weigh risks versus rewards and measure your own risk tolerance. This is why many investors buy assets considered safe, such as real estate, which is land and permanent structures such as homes and buildings; stocks, which are shares that may entitle their owner to a fixed dividend from a company; and bonds, which are debt investments that lend money to a company, government, or other institutions.
These three are considered the safest. That does not mean they guarantee returns, but that you’re less likely to lose money with them compared to other kinds of assets. On the other hand, if you are confident that investing in riskier assets such as cryptocurrency and options will earn you money in the long run, go for it.
Lastly, regardless of your risk tolerance, it’s a good thing to lessen the risk involved in investing. To do that, you must diversify your investments. This means buying different kinds of assets. That way, if the value of a certain asset type tanks, there’s still a chance that other asset types are doing well.
Savings vs. Investing
Before choosing, it’s important to consider what your goals are first. Savings accounts make it easy to fund short-term goals like a vehicle or housing down payment. On the other hand, long-term goals like retirement benefit from investments with higher long-term returns.
Next, examine the pros and cons of saving and investing. Investments are riskier and require research and educated prediction, but could yield higher returns than savings accounts. On the other hand, saving provides security. Your savings won’t grow, but they are safe from market volatility and are accessible via debit card or online banking.
Finally, consider each option’s costs. Investments, especially with a financial advisor, cost more than savings accounts. But if you can afford it and you’re confident that the investment will yield returns, go for it.
Conclusion
Knowing the differences between savings and investments and analyzing their pros and cons can help you decide which course to take. It’s also important to remember that unless you have no plans to invest, you’ll do both at different periods of your financial life. Maybe you can only afford to save for now, but in the future, you’re likely to be interested in investing. On the other hand, once your investments have yielded returns, you’ll have to allot a part of it to your savings.
At the end of the day, no single option fits everyone’s financial situation and goals, so it helps that you know how to both save and invest.
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