You’ve probably come across the terms ‘saving’ and ‘investing’ in finance. Also, if you are like many people, you might have used them interchangeably, thinking that they imply the same thing. To secure a great future financially, you need to save and invest. But, what do these terms mean?
Understanding the difference between saving and putting your money in investments is helpful in deciding what to do at any given time. Arguably, you need to save as well as invest if you want to achieve true success. Each of these terms has benefits and how you play your cards with them determines whether or not you will achieve your goals.
To help you build a strong foundation and create wealth, you need to know when to save or invest your money. In this post, we explain the difference between these two and explain how you need to make a choice.
An Overview of Saving Vs Investing
Saving means putting your money aside for use or spending later. You can also put it aside to accumulate it, so you use it for your goals, such as building a home or purchasing a car. It can also be that you are keeping it to cushion you and your loved ones against any unforeseen emergencies.
While it sounds awesome and anyone can do it, saving needs discipline, especially when doing it over a relatively long time.
Investing, on the other hand, means putting your money into use in projects or activities that will help you earn more money in the future. Investing is the foundation of building wealth. Depending on your investment options, your money can grow faster or slower. But then again, it needs discipline. You also need to learn investment options that are viable.
If it helps, there are investing for beginner courses online that you can enroll in. Participating in such investing course will help you gain knowledge of the technical analysis of the financial markets.
It will also expose you to different investment types. You’ll learn how to invest as a beginner or learn how to invest in stocks. You will also be familiar with cryptocurrency and know the best crypto investment.
When Should You Choose To Either Save or Invest Your Money
Perhaps the best way to explore the differences between saving and investing is by looking at the instances where it is appropriate to undertake any of them. So, when is the right time to save or invest? Here are suggestions:
When to Save
- If You Will Need Money Soon
A short-term savings plan is great if you need money within a few years. In such instances, time and circumstances might not be appropriate for you to invest in long-term projects that increase returns on your capital.
You might be anticipating events or activities that will require that you spend the money. It thus makes sense to identify ways of keeping it intact in expectation of a future need to use it.
Some of the best short-term savings options you can consider, given a short time, include money market funds and a high yield savings account. With any of these, you will keep your money safe for use when you need it and get some returns.
- If You Intend To Build An Emergency Reserve
Financial experts recommend that it is good to have an emergency reserve fund. Most people often do it before they dive into long-term wealth creation plans. It is reasonable to ensure that you will not stop your activities because of an emergency that needs money.
Indeed, saving for an emergency is great, but how much should you save? While there is no limit, financial experts recommend that you put aside a sum equivalent to your three to six months’ expenses. Such an amount will be sufficient to keep you going if you lose your sources of income.
- If You Want To Pay Debt First
If you have high-interest debt, perhaps the best thing to do with your money is to save and pay it first before thinking about investing. You can save for a few months, earn some interest, and then use it to clear your debts. It might be the best option to clear your credit card debt.
Paying off your debt first gives you ample time to prepare, so when you finally start investments, you enjoy peace of mind knowing you have no financial obligations. Investments often take a long time to give your returns compared to savings. It is thus better to save if you want to pay your debts.
When to Invest
- If You Do Not Need Money Soon
If you have some extra money and do not need it within the next five years, the best thing to do is invest. Depending on what you do with it, it is likely that when you need it, you will also have some returns on top of the initial amount. Some of the projects you can consider here include bank products, stocks, bonds, mutual funds, and annuities.
You should, however, note that investments, whether short or long-term, have some level of risk. So, if you are not comfortable with risks. In some instances, you might also lose your investment though rare but possible. It is, therefore, good to be careful when making your evaluations and decisions.
- If You End Up with Extra Money Every Month
If after paying your bills, and debts and you also have a good amount of emergency funds, you have some money left, you need to invest. An investment will help you grow your dollars and also reduce unnecessary expenditures. You do not have to invest big. With small steps, you are likely to create wealth and even earn more money in the future.
One of the best options to invest your extra money is through a project that will use the extra cash every month. You can thus make a budget and plan how to absorb the excess funds into viable projects. With consistency, you might enjoy huge returns on your investments.
In conclusion, the main difference between saving and investing narrows down to time and the need to set aside money for some purpose. For a short-term plan, saving allows you to keep your money for use when the need arises, whether there is an emergency such as an illness or loss of a job.
Investing, on the other hand, is best for long-term money plans. It is the best option if you are looking for ways to grow your money over time.