The words “saving” and “investing” are sometimes used interchangeably, but when it comes right down to it, we should be engaged in both, separately, to secure our financial future.
A shared characteristic of both savings and investing is the upmost importance that they play in our lives. If you are not doing either, the time is now to get started. This may require changes in spending, tracking and change in utilization of your income, but can and should be built into your plan. (See, 10 ways to effectively save, to help you start saving.) A general rule of thumb is we should not save long term but should invest long term. We should not invest short term, but save short term. Keeping that in mind, let’s review the differences. Also, keep in mind for both savings and investing that when risk goes down, liquidity goes up and vice versa.
To start, the biggest and most influential difference is risk. The difference involved with savings and investing, are much different and important to differentiate. You save when you put money into a savings account like a money market or Certificate of Deposit (or CD). It has little risk of loss of funds but also has minimal gains. When you save, you are usually able to pull that money out when you want (or after a period of time) to use. When you invest, you have the potential of better gains or rewards, long term, but also the potential for loss.
You risk more in investing for a larger return, but your potential loss is available as well.
It is important to review your goals and see what the best option for each is, saving or investing. Done incorrectly, it could cost you a lot of money in fees or loss of potential income, earned through investing.
What Do We Save Versus What Do We Invest?
We save for purchases and emergencies. We save for things that need a vehicle to sit in, available when we need them and have low risk of losing value. It is important to track your savings, put a deadline or timeline to your goals and a value. For example, if you are saving for your annual family vacation, you might want to target $3,000 to save in nine months, to withdrawal in December. You then know how much you need, how much to save monthly and the ability to take the money, without fee to spend on that treasured vacation.
When investing, it is important not just to invest, but invest wisely. You will have a better return when you invest early. Understanding different investment vehicles, what they are for and how to use them will be imperative to being successful. We invest long term, for our children’s college fund or retirement. We use specific vehicles that allow for growth, like these. If our children have 10-plus years before they go to college, we can invest monthly in a vehicle like an education savings account (ESA) or 529 plan. These allow for withdrawals when your child goes to college. Long-term college plans, like the ones reviewed in this article, can help you to direct that goal, successfully.
When saving for retirement, it is marked as the end of your income earning years but the desire would be to utilize funds invested throughout your working years combined with any employer pension plans, Social Security benefits, annuities or other long-term investments. There are many options to start or continue your retirement funding. (See, Build Your Own Retirement Plan.)
Another difference is interest, or money made. In investing, we want our investments to make us money vs. when saving, it is to keep our money safe, making very little return.
A certificate of deposit is another savings tool. This tool is relatively short term, ranging from a few months to many (7 or more) years. While in the CD, your money is safe and grows at a little bigger interest rate, than in a regular savings account but you do not have access to it until the term of the CD is over.
It is possible to be a wonderful investor, have growth in your 401K and have investment properties, but unable to make ends meet, if you do not understand how to save and follow through. You can save, penny pinch and save money each month, impressively, but long term, that savings will not pay in retirement and most likely will not pay your children's college plans, making investing equally important. Reminding us how important both are, when done together.
Where Is the Line Drawn between Short and Long-Term?
Generally speaking, short term is under 7 years and long term is over 7 years but when it comes to saving and investing, do not be too tied into the specific amount of years but more the need of the goal. Keep in mind when you will need funds, what your plan is for the funds and the safety/risk associated with it.
In the end, do not wait to do either. Time is the greatest opportunity to grow your money and to meet your goals. With as little as $1,000 you can start investing and start the path to reach long term goals and success.
Once we understand the difference between the two, CNN Money says it is easier than we think to follow through. We need to save and invest more than we are and do so for longer than just a few years. In investing, investing for your working years, is the only way to see measurable results. Lastly, we need to understand the definition of wealth. The author states "I've often said that finding your 'Enough' is what matters most...has shown how easy it can be to feel wealthy if you adjust your perspective and understand that the only true measure of wealth is freedom of time -- not your net worth."