It is widely believed that saving and investing are the same thing. They are not. The main differences lie in the purposes, risks, and returns. Most people stick to only saving because they get overwhelmed with the amount of information they need to do learn before starting to invest. Studying is crucial since some people fall under the “get-rich-quick scheme” and often end up losing all of their capital. However, you shouldn’t let it stop you from investing since there are plenty of free courses online. Investing will bring more interest on your money, and a better quality of life.
Definition of saving
“Saving” can be defined as setting money aside for the near future, before or after spending an income. It usually has a short-term purpose, such as a trip, or buying a product or service. Saving has little to no risk, and you’ll have the money available when you need, rather than having to wait to cash it out. People who save money usually accumulate it in the form of cash holdings or deposit it into a savings or checking account.
Definition of investing
On the other hand, when you invest, you’re buying assets like properties, stocks, or bonds to make even more money. Unlike saving, you won’t have that much liquidity. In other words, you won’t be able to get your hands on the cash as fast as you would if you saved the money. There are many types of investments, and the best one will depend on how much risk you are willing to take. The higher the risk, the higher the return.
Which one should you choose?
Ideally, you should have a mix of both, depending on your life goals. Having money saved up can make you happier and less anxious. A survey conducted by Ally Bank reported that 38% of the people who had money in a savings account were happy or extremely happy. When you save you know there’s an emergency fund, therefore, you’re prepared for the unknown. It will also prevent you from accumulating debt, and as a consequence, raise your credit score.
At the same time, investing will grow your capital, and can potentially make you wealthier, thanks to compound interest. If you have long term goals, such as buying your own home, or start a business from scratch, investing is better than saving. It is also great for people who want to retire early and enjoy their life without needing to work.
To become financially independent, the first thing you need to do is understand your investor profile, which could be conservative, moderate, or aggressive. And you should be also looking into diversifying your portfolio. It should contain a mix of commodities, foreign fixed income, US stocks, and foreign stocks, US fixed income, among other investments, with high and low risks and liquidity.