Saving and investing are not the same thing even though people sometimes use those words interchangeably.
Knowing the difference can help you reach your financial objectives. When you are saving, you are concerned primarily with securing your hard-earned money, while not losing any of its value.
Typically, savings are earmarked for an emergency or a goal. While saving money may preserve your money’s value, opportunities to grow your money are limited. Your “savings” are usually put into the safest places or products that allow you access to your money at any given time. Examples include savings accounts, checking accounts, and certificates of deposit. At some banks and savings and loan associations your deposits may be insured by the Federal Deposit Insurance Corporation (FDIC).
But there’s a tradeoff for the security and ready availability (liquidity) of these savings methods: your money is paid a low wage as it works for you. When you’re investing, you give your assets the potential to grow over time.
You typically reinvest your interest, dividends, and capital gains. Often you are prepared to take a little more risk with investment money than you are with savings. With the opportunity for growing your money comes the risk that your account value may decrease. When you “invest,” you have a greater chance of losing your money than when you “save.”
Unlike FDIC-insured accounts, the monies you invest in securities, mutual funds, and other similar type of investments are not federally insured. You could lose your “principal,” which is the amount you’ve invested. But when you invest, you also have the opportunity to earn more money than when you save. There is a tradeoff between the higher risk of investing and the potential for greater rewards.
This is a rule of thumb stating that in order to find the number of years required to double your money at a given interest rate, you divide the compound return into 72. The result is the approximate number of years that it will take for your investment to double
Investment Options
This is not an all-inclusive list but shows the main options for both saving and investing:
Options for Savings:
- Saving account
- Checking account
- Certificate of deposits (CD)
Options for Investing:
- Stocks
- Real estate
- Mutual funds
- Commodities (i.e. gold, silver, copper)
- Bonds
The Stock Market
The stock market is a place where shares of publicly held companies are issued and traded either through exchanges or over-the-counter markets. The stock market provides companies with access to capital in exchange for giving investors stock in the company. The stock market makes it possible to grow small initial sums of money into large ones, and to become wealthy without taking the risk of starting a business or making the sacrifices that often go with a high-paying career.
The stock market is a place where you can put your money to let it work for you. Many people are afraid of the market as many lost much of their money from the dot-com bubble (1997 to 2000) and the crash (2008 to 2009). The news of fraud cases which are beyond the control of individual shareholders also impacts the trust investors place in these companies.
By not investing you are securing your principal and limiting your growth potential. By investing you are allowing your money to work for you in an effort to maximize your
growth potential. The stock market is a risky game for many who are unfamiliar, but is a necessity to ensure retirement.
We encourage you to research the market and its trends. Find out where analysts expect your favorite companies’ stocks to be trading. Perhaps start with a virtual account and when you feel comfortable start an account with real money.
Asset Allocation and Diversification
If you begin to invest in the market (i.e. the stock market) you must remember the two very important concepts. Diversification and asset allocation is what will save you from losing a large portion of your investments in down markets (bear markets) and allow you to capture the upside during great markets (bull markets). You might not make an annualized 15% return but you will also not lose as much if the market goes sour.