The words “saving” and “investing” are often incorrectly interchangeably used. While both involve setting money aside, the role of a savings account is very different than that of an investment account.
Not sure when to save and when to invest? We’ve got you covered in today’s post.
What’s the Difference Between Saving and Investing?
The difference between the two comes down to short-term and long-term goals. Saving money is best for short-term goals (goals you hope to reach within one to five years), while investing money is better for long-term goals (goals at least five years into the future).
Some examples of why you should set savings aside include:
- Purchasing a new car
- Going on a vacation
- Buying holiday gifts
Investing is all about achieving long-term goals, like:
- Going to college
- Retiring at a certain age, for example, sixty-five
- Leaving a substantial legacy for family
Funds kept in a savings account are a lot more accessible than investment funds, typically being readily available within a matter of days. Because you are not investing the money, the risk of a savings account is low.
On the flip side, because these funds aren’t being invested, your return on investment is extremely low. The money you invest, while at a greater risk and less accessible, will potentially earn you much more money over time than a savings account.
Balancing Savings and Investments
One option isn’t necessarily better than the other. In fact, you might want to have all your money placed in both types of accounts to achieve your varying goals and needs.
Most financial experts recommend having savings be your first priority. Having a solid savings account will serve as a financial foundation since it will give you the capital you need to fund your investments. If you encounter financial hardship, you’ll also be able to rely on your savings to cover your back while your investments continue to work hard in the background, generating more long-term revenue for you.
An exception to this rule is saving money in a special retirement fund, such as a 401(k) plan in the USA, if your work participates in contribution matching. There are two benefits to this:
- You’ll enjoy a healthy tax break; and
- The matched funds are free cash!
It’s also important to clear off any high-interest debt (like credit cards) before you begin to invest. The return on your investment versus the interest you’d pay for that debt just isn’t worth the return.
Once you have enough savings to cover at least three months of your living expenses (this means insurances, utility bills, food, rent or mortgage, and clothing) and have taken care of high-interest debts, then it’s a good idea to start looking into your investment options and opportunities.
Opportunities in P2P Lending
One of the leading opportunities available to investors today is peer-to-peer (P2P) lending. In some cases this form of investment help small businesses grow and allow you to support your local and national economies, besides P2P lending can deliver fantastic income returns to investors, and it is probably one of the most rewarding ways to invest.
It may take a bit of time to strike the right balance between saving and investing, and that balance will likely change from time to time. But once you have the two set into motion, your money will continue to grow and that emergency fund goal and your retirement plan might transform into a reality sooner than you think!