*Don’t be confused, saving and investing are not exactly the same thing. You have to use both skills to build wealth and accomplish your goals. But, there are major differences between the two.
An investment is ownership and saving is not. You save to preserve money for the present and immediate future. You invest to grow money for your future.
Saving is a short-term situation (less than seven years). You can also liquidate your money almost any time you need it. Your goal is to protect this money from the market’s ups and downs. This is money that has to be there when you need it. Savers use savings accounts, money markets, checking accounts or certificates of deposits to accomplish their goals. You can use these tools for day to day expenses, building emergency funds, saving for home down payments or some other short-term goal.
Investing is a long term situation (seven years or more). It usually takes that long for investments to mature. Investors typically own a portion of whatever they are investing in. Investors use stocks, bonds, real estate and other equities to accomplish their goals. You can use these investments to build wealth, finance retirement or for some other long-term goal.
Saving is the best options anytime you have a time horizon of less than seven years.
For example, let’s say you have $2000 that you will need for a home down payment in two years. Your best bet is to save it. Put it in a savings account or certificate of deposit. Why? Because, you are going to need your two grand when it’s time to buy your house. You can’t afford to expose your $2000 to the market’s ups and downs. You need guaranteed money in a short period of time.
Investing is the best options anytime you have a time horizon of seven years or more.
On the other hand, let’s say you have $2000 and you want to use it to start saving for retirement. Your best bet would be to invest it. Investing in this example is better than saving because over the long term investments will earn you more money than saving. There are more risks connected with investing, but you minimize some risks when you invest long term.
In the end you have to use both techniques. Keep this in mind when you are managing your finances.