The Importance Of “Saving” And How That Differs From Investing
Finance Tips Both saving and investing involve putting money away for the future. That said, there is a tremendous difference between the two, and they’re both equally important to implement in our financial plan.
Saving. Investing. Same deal, right? Not even close in my book. Saving, for us, is putting money aside bit by bit for something specific and within a defined (shorter) timeframe, such as within one or two, or maybe even up to five years.
We use savings to build up and then maintain our emergency fund. When we were younger we saved up for a down payment on our house. We use savings to pay for our next international trip. We use savings to build up a cash fund to purchase a newer car or items we want to buy around the house. “Saving” is basically something we’ll pay for, eventually, with primarily our own money along with some interest payments along the way. Think of “saving” like preservation, like keeping something safe from loss or harm.
Investing is arguably far more powerful than saving ever could be. Investing is putting money into an asset, for the objective of a long-term return. Investing has the expectation that your asset will grow, potentially considerably in value, given enough time and return on your side. With investing you are forgoing consumption today to have the ability to consume more at a later date. That said, unfortunately many people today are into the consumption today and I’ll-figure-it-out-later mentality when it comes to money and investing it. Worse still, I believe many people think investing in the stock market in particular equates to a form of gambling or speculation, rather than investing.
I suppose depending on how you define “investing” that could be true! Gambling and speculation usually offer a small chance of a very high return. I don’t see investing this way. Investing is the long game. Speculation is nothing more than rolling the dice.
Long-term, investing can grow your money thanks to year-in, year-out compounded returns of stocks and bonds. While losses can and do occur with investing over the short-term, you “invest” because long-term, over many years or even decades — the money you invest makes far more money that what you put in.