Why to invest rather than save

 -To my mind, savings and investments were the same thing, but when you sit down and think about it, they’re actually quite different.

Saving vs. Investing Money

- Saving money and investing money are entirely different things, with different purposes and different roles in your financial strategy. Making sure you are clear on this fundamental concept before you begin your journey to building wealth and finding financial independence is vital.

 finance-monthly.com

What Is the Definition of Saving Money?

Saving money is the process of setting cash aside and parking it in extremely safe securities or accounts. The money is also liquid, meaning cash can be accessed in a very short amount of time.

What Is the Definition of Investing Money?

Investing money is the process of using your money, or capital, to buy an asset that you think has a good probability of generating a safe and acceptable rate of return over time.

How are saving and investment similar?

Savers and investors both also realize the importance of having money saved. Investors should have sufficient funds in a bank account to cover emergency expenses and other unexpected costs before they tie up a large chunk of change in long-term investments.

How are saving and investing different?

“When you use the words saving and investing, people — really 90- some percent of people — think it’s exactly the same thing,” says Dan Keady, CFP, and chief financial planning strategist at TIAA, a financial services organization. While the two efforts share a few similarities, saving and investing are different in most respects. And that begins with the type of assets in each account.

So which is better – saving or investing?

Investing is better for longer-term money — money you are trying to grow more aggressively. Depending on your level of risk tolerance, investing in the stock market, exchange-traded funds or mutual funds may be an option for someone looking to invest. When you are able to keep your money in investments longer, you give yourself more time to ride out the inevitable ups and downs of the financial markets. So, investing is an excellent choice when you have a long time horizon (ideally many years) and won’t need to access the money anytime soon. “So if someone’s beginning with investing, I would encourage them to really look at growth-stock mutual funds as a great starter way to get your foot in,” Hogan says. “And really start to understand what’s going on and how money can grow.”

Pros of saving

There are plenty of benefits to saving rather than investing. First, the dollar amount you save in a savings account won’t decrease over time as long as you don’t make withdrawals. This is important because some goals need to happen regardless of whether investment prices are up or down. Saving rather than investing also allows you to reach your goal on time as long as you save the proper amount each month. Take the total you need to save and divide it by the number of months until you need to reach your goal to find the amount you need to save each month. Cons of savings Saving does have downsides though. Due to inflation, the money you save will decrease in value each year. If you earn interest, that interest may partially offset the negative effect of inflation. Unfortunately, interest rates rarely keep up with the rate of inflation. Saving also means you’ll have to set aside more money each month than you would if you received higher returns investing. 

Set your savings goals

As you can see from the table above, you probably have quite a few financial goals. They’ll all have different timescales, which means you might want to do some saving and some investing. That’s why it’s important to make a plan.

Is there really a difference between Saving and Investing?

Most of us think that Saving and Investing are the same thing. While the terms are often used interchangeably by many, they are as different as chalk and cheese. The difference between your monthly income and your expenses is what constitutes your "savings". But when you multiply the money you save by putting it in various asset classes such as stocks, bonds, real estate or gold, you are creating wealth by "investing".

Set your savings goals

As you can see from the table above, you probably have quite a few financial goals.They’ll all have different timescales, which means you might want to do some saving and some investing. That’s why it’s important to make a plan.

Saving vs. Investing

Saving and investing are important parts of a sound financial plan. Whereas saving provides a safety net for unexpected expenses, investing is a strategy for building wealth. Once you have an emergency savings fund of three to six months’ worth of living expenses, you can develop a strategy to grow your wealth through investing.

Is One Better Than the Other?

Saving and investing are equally important to sound financial planning. Neither is considered “better” than the other except when applied toward a specific goal. And even then, it’s more accurate to say one is more suitable to specific objectives. For example, if your goal is financial security in retirement or creating a cushion for unexpected expenses or job loss, saving is more likely to help you achieve that goal. If, on the other hand, you have built an adequate emergency fund and are motivated to grow your wealth, then investing is the more appropriate use of your money. However, stock market volatility will always pose a risk to this potential reward so you should be willing to accept the risk that you could lose your money. Striking a Balance Between Investing and Saving Many experts advise building a solid savings for emergencies and retirement before investing in riskier stocks. The reason for this is simple: the fluctuation of the stock market could mean that investors lose money. If you have nothing in savings and the stock market does poorly, you have no financial resources should an emergency arise. Would-be savers and investors may also be deterred by the complexity of some of the financial instruments they have to choose from. Indeed, many of these products have characteristics of both, making it hard to know which products qualify as savings tools and which constitute investments. Variable annuities, for example, are sold by insurance companies along with other types of annuities designed specifically for retirement saving. But they are classified as securities and regulated by the Securities and Exchange Commission.

Savings

In fact, many Americans believe they don’t have enough money to contribute even a small amount to savings.

Pros and Cons of Saving Without Investing

A list of pros and cons of saving only makes sense in the context of saving money to the exclusion of investing. In fact, the benefits of saving money far outweigh the scant disadvantages. Not all savings methods are created equal. Different savings vehicles offer specific benefits such as tax-deferral, higher returns and greater flexibility and liquidity. Note that accessibility is included on both lists. Liquidity can be a detriment or an advantage depending on your self-control. If you know you’re inclined to irresponsible spending, you might want to take that into consideration when you’re selecting a savings vehicle. It makes sense to have more than one type of savings, too. You might want an emergency fund in a high-yield savings account that you can access easily in a crisis and a CD with a future maturity date for a child’s college fund.

Pros and Cons of Investing

The primary advantage of investing is the opportunity to grow your principal. Unfortunately, this opportunity always comes with the risk of loss. And, unlike deposit savings accounts, most investment vehicles require that you have at least a rudimentary understanding of key investment concepts.

How Much Money Should You Invest?

Once you have an emergency fund in place, you should invest enough money to reach your growth goals. These will look different for everyone, but most people will share the common objective of keeping up with, or beating, inflation. The average inflation rate is roughly 3 percent per year. This means that the money in your savings account will lose value over time. To preserve your money’s purchasing power, you’ll need an investment strategy that strikes a balance between moderate growth and risk management. To grow your wealth, on the other hand, you’ll need to assess your risk tolerance. You’ll be exposed to more risk than you may be comfortable with. Having a knowledgeable financial advisor at your side can allow you to invest with more confidence, especially if you’re new to investing. A professional with risk management experience will work with you to build a diverse portfolio that can weather the ups and downs of the stock market.

Investing Tools

For those who have the skill, desire and knowledge to manage their own investments, online investment platforms and investment apps, such as investor and Robinhood, make it possible to analyze the markets, evaluate your investments’ performance and trade stocks without a traditional broker. Automated investing platforms, called robo advisors, use algorithms to allocate assets. Robo advisors are less expensive than traditional advisors and provide less experienced beginning investors with a place to start in the world of investing. As with all investing tools — and investments themselves — each robo advisor service has its own fee structure, level of support and minimum-deposit requirements. Do your research before choosing a robo advisor or other do-it-yourself (DIY) investment tool.

5 Reasons to Start Investing Early

Investing, as with anything in life, benefits from an early start. The earlier you begin planning for retirement, the greater your potential return on investment.

1. Time allows you to take risks

Typically, when it comes to investing, ventures that are more volatile yield the highest return on investment. Investors, who have the time to recover if something were to go wrong, have the opportunity to make riskier moves. Those who begin to invest late in life are often inherently more cautious with how they invest their money.

2. Compound interest really makes a difference

Essentially, compound interest is the interest earned on interest. By continuously reinvesting your earnings, you are exponentially increasing your return on investment. Savvy investors understand the benefits of investing early and taking advantage of the potential gains from compound interest. To help you understand how time and compound interest are related, here’s an

example:

Twenty-five year old Madison invests $2,000 annually over 10 years in her company’s 401(k), with an average growth of 10 percent. When she retires, at the age of 65, her investment would have grown to $556,197. On the other hand consider Cooper, age 34, who invests $2,000 annually over 30 years into his 401(k). At age 65, Cooper who has invested three times as much as Madison, will have $328,988 in his retirement account. In this example, Madison, who began investing early and gave her money time to earn compound interest has $225,000 more than Cooper to spend during her retirement.

3. Your spending habits will improve

Investing early allows you to develop disciplined spending habits by focusing on your budget and cutting expenses when needed. The goal here is to earn money by saving money. This is impossible with poor spending habits and a life full of impulse buying. Through early investment, the lessons learned will pay off in the long run, especially, when you have even more capital to work with and restraint is needed.

4. Be a step ahead of everyone else

The early bird gets the worm is an idiom worth adhering to. The earlier you begin investing, the better your personal financial situation will be down the line. Compared to your counterparts, who may have chosen to invest later in life, over time you will be able to afford things that others can’t. Additionally, at some point your finances may become unstable, but by investing early you’ll be prepared to face such hardships.

5. Your quality of life will improve

Military members who invest in retirement plans such as a Thrift Savings Plan, 401(k) or Roth IRA are taking steps toward an improved quality of life. Early investment will reduce the risk that you’ll be forced to make reckless choices to secure a stable retirement. When it comes to investing in a new home, military buyers should also be aware of their mortgage options and make decisions based off of their unique financial situations. Check out this helpful guide to the VA home loan process.

Step Wise Analysis of Investment vs Savings

There is a thin line of difference between savings and investment, to understand the same some step-wise analysis is given below: First, we have a “money surplus” situation on a monthly basis i.e. Earning more than spend. Then we start to have some accumulate surplus monthly or yearly till we feel secure that we have some buffer should we have an urgent need for money.

Third as our situation improves further, we start to desire things we need to buy – maybe a bike, clothes, car or a house. Fourth, we start to desire (want) certain items – may be a fancy music system, a nice vacation, etc. Fifth, if after most of our needs and wants are fulfilled, we start looking at options to put the money left over, into areas with the intention of generating more money for us in the future. Saving is something one does from stage 1 till 4. Investing occurs only from the 5th stage onwards.

Key Differences

Savings means to set aside a part of your income for future use. Investment is defined as the act of putting funds into productive uses. People save money, to fulfill their unexpected expenses or urgent money requirements. On the other hand, investments are made to generate returns over the period that can help in capital formation. Savings do not have any risk of losing money, whereas In Investing there is a risk of losing money.Savings have nominal returns, whereas Investments have high returns if invested wisely. You can have access to your savings, anytime because they are highly liquid, but in the case of investment, you cannot have easy access to money because the process of selling the investments takes some time.

Conclusion

Savings, alone cannot constitute the increase in wealth, because it can only accumulate funds. There must be the mobilization of savings, i.e. to put the savings into productive uses. There are a number of ways of channelizing savings; one of them is an investment, where you can find unlimited options to invest your earnings. Although risk and returns are always associated with it, when there is no risk, there is no return. The stepping stone of wealth formation is savings, which is decided by a person’s level of income. The higher the income of a person, the higher is his capacity to save, because the rise in income increases the propensity to save and decreases the propensity to consume. It can also be said that it is not a person’s ability to save that encourages him to save money, but the willingness to save forces him to do so. In other words, investing is just one kind of saving. Whenever you put something aside, regardless of your hopes for the future, you’re saving. When you put something aside with the hopes that it will somehow provide a bonus to you after you set it aside, you’re investing. While saving is a must for investing, it is important to save one’s wicket in order to be able to score later. One can save the wicket by playing defensive cricket and avoiding all sorts of shots. But that would result in a very low score. He would need to hit some boundaries by taking certain risks like lofted shots or drives between fielders or cuts and nudges.