A lot of people believe that saving is the same thing as investing. Are you one of them? If so, keep reading. They are not the same. Saving and investing are very different. In this article we are going to briefly explore the differences between saving and investing. We will also take a short look at the risk level differences of saving versus investing.
Saving. Savings is putting away money for a particular purpose. The purpose could be anything! It could be something as important as an emergency fund, a house down payment, or could be for something fun like a vacation. Either way, it has a straightforward purpose. Or, in the case of saving for an emergency fund: to put cash away to avoid future money problems. The goal of saving is to put money away for short-term projects (usually to purchase something).
Investing. Investing is buying specific investment products with the purpose of increasing the value of your principal (the original amount of money invested). Investments typically include stocks, bonds, mutual funds, exchange-traded funds, and real estate property. An investment is an asset that is purchased in order to build wealth over time. Investing can also be geared toward specific purposes. These specific purposes can be retirement or a child’s college tuition. The goal of investing is to create wealth for the long-term future and to out-pace inflation.
Risk. Saving and investing differ when it comes to risk. The risk is there’s a chance that your principal might lose value. Saving money is meant to be used for a particular purpose. Therefore, you will not want to put that money at risk, right? Money that is going to be used for investment can handle some risk since it is not going to used for a long time. Remember, investment money is typically used to grow wealth over time.
In conclusion, saving is more about the present and investing is more about the future. Saving is less about beating inflation and investing is all about beating inflation. Saving money is going to be used soon and investment money won’t be used for a while. Keep those differences in mind when making financial decisions with your cash.