Friday Financial Tidbit-Saving is different from investing

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If you have heard it once, you have heard it a million times; you need to save and invest more money. While those are both true statements, often we can see saving and investing as the same thing. But in reality they are totally different.

When we save money, we are keeping money available to be used in the near future, typically within five years or less. You aren’t taking any risk because you are keeping your money in a savings account or certificate deposit at a bank. That won’t make you a lot in interest, but you also won’t lose any money if the economy goes bad.

When we invest money we are talking about money that will be used in the future, typically five years  away or more. We can invest in things like real estate, stocks, bonds, or other investments in retirement accounts such as a 401(K) at work or an Individual Retirement Arrangement (IRA). You invest to grow your money by having good long term returns. In investing typically your returns will vary depending on the investment. You are taking a risk that you will lose money, in the short term, but in the long term you will ultimately make more money than saving.

Why this is so important is that a lot of times we “save” when we should be “investing” and over time this can have a long term impact on our finances. Say, for example, 30 years ago you were a good saver and had $100,000 saved up. But you never invested and instead you just let it build up in a savings account. Well after 30 years, you wouldn’t have made much in interest but you didn’t lose anything either. However inflation would have eaten away at your savings. For example, what you could have bought 30 years ago for $100,000 would cost you approx. $234,000 today, a decrease in purchasing power of 58%! If instead you would have invested your money, ridden the ups and downs of the market and earned a conservative 8% average rate of return, your nest egg would have grown to over $1,000,000 in that time!

There’s a time both to save and to invest, but they aren’t the same. We don’t like to lose money on our investments so it might seem “safe” to save our money and not invest. But in reality, in the long run it is a lot riskier to save and never invest. I’ve seen so many times people who are good savers, but not good investors and have seen inflation eat away at their nest egg. So when you get to the point that you are ready to invest, make sure that you are truly investing and not saving.

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2 Responses to Friday Financial Tidbit-Saving is different from investing

  1. Michael Taylor says:

    It too me a while to figure this out. The 15% that Dave Ramsey recommends is Investing, not Saving. Good Tidbit JW.

    • Jon White says:

      Michael it definitely can be confusing at first. But once you realize that your investments are for the long term it makes it easier to distinguish between the two.

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