How The Difference Between Saving And Investing Can Secure Your Financial Future With Higher Rates Of Return
NOTE: This page is part of the Start Investing Guide. To go through the Guide in order, go here: Start Investing Guide
Many people don’t understand the difference between saving and investing. And I get it. Sometimes these terms are used interchangeably, leading to the confusion.
A lot of people, myself included, use the word “saving” when they really mean investing or the word “investing” when they really mean saving. But they really are different.
Understanding the difference between saving and investing can help you plan for a more secure financial future.
There is definitely a place for saving and investing in your overall financial planning. But when looking to secure your financial future, investing is definitely where you’ll want to put your focus.
On this page we are going to go over the difference between saving and investing and how each relates to your financial security.
This page is detailed, so I suggest reading the page all the way through once, and then use the Table Of Contents to revisit specific sections later.
Definition Of Saving And Investing
Let’s start off by giving some simple definitions of saving and investing.
Saving means putting money aside for future use. Basically, you take the money you don’t spend and keep it in a safe place (usually a bank), until you need it.
Investing means putting your money to work with the expectation of generating a profit. Basically, you use your money to make more money.
Now we have a starting point for looking at saving and investing and what role each might play when working towards lifelong financial security.
Why We Need To Save And Invest
In The First Place
Saving and investing are important for a wide variety of reasons. But I want to focus on just two.
Firstly, most people ascribe to a “Save & Spend” approach for surviving later in life. They “save” money in their working years while they have a steady income. Then they “spend” this money in their non-working years when they no longer have a steady income.
The goal is to save enough money to live comfortably, protect yourself in the event of an emergency, reduce financial stress and nourish a sense of financial security and freedom.
However, it is very difficult to just “save” enough money for the future. This is where investing comes in.
By investing, you put your money to work to make more money. This accelerates your wealth accumulation and allows you to grow your money exponentially.
Secondly, inflation.
Over time, your money loses value due to inflation. This means that when you want to spend your money in the distant future… it has less purchasing power. The same amount of money buys you less.
To offset inflation, you need to invest your money to beat the inflation rate, or the money you save will be less valuable in the future.
By investing, you can not only maintain the value of your saved money in the future, but grow the overall amount of money you have at a later date. So your money has the same value, and you have more of it.
As you can see, you need to save money for the future. But the wise choice is to invest this money to grow your wealth and protect against the negative effect of inflation.
4 Differences Between Saving And Investing
How do you know when to save and when to invest?
Let’s go over 4 differences between saving and investing:
Time Period: Savings are traditionally smaller financial goals that can be achieved in a shorter amount of time, typically between 1 and 3 years. Think about buying a new cell phone or saving for a vacation.
On the other hand, investment goals are traditionally larger amounts of money that need more time to grow, typically over 5 years. Think about putting money away for college tuition or my favorite… reaching a level of lifelong financial security.
Access To Money: You tend to have more access to your money when saving than you do when investing. So, savings provides more access to your money than investing does. This also can lead to the temptation of using the money for things it was not intended.
A lot of investments require mandatory time periods and will hit you with substantial fees for early withdrawal. If something unexpected happens, you won’t be able to easily get a hold of your invested money.
(The way I “invest”, I always have access to my money. However, I try to treat my investments as long term commitments and only will withdrawal money in an extreme emergency).
Risk: Savings usually enjoy very low risk or no risk. For example, putting your money in a savings account is even safer than keeping your money at home.
The amount of risk on investments depends on a lot of factors and can vary greatly. Investing, any type of investing, has risk and there is no guarantee you will make any money at all.
Investing is also much more volatile than saving, so be prepared for your investment capital to go up and down over time.
Returns: Savings has low risk, which means there are lower returns. Investing has more risk, which means the potential returns are much higher… especially over the long term.
As you can see, there are some big differences between saving and investing. That being said, both saving and investing have their place in your financial plan.
For emergencies and short term goals, you should save your money with low risk and easy access. Just don’t expect to get any meaningful returns.
However, if you want the best return, you’ll need to invest your money, assume some risk and forfeit immediate access to your funds. But as I’ve stated previously, this might be the only way to reach the financial goals that leads to a secure future.
The Sad Reality Of Saving And Investing
The sad reality of saving and investing is… most people aren’t doing either. And that means an unstable and fragile financial future lies ahead for the vast majority of people.
Check out this infographic:
You will find more infographics at Statista
I understand it is hard to save money. It seems like we are always making less and everything costs more. But if your goal is to have a secure financial future… you must come up with a plan to get extra money.
If you don’t have a plan or know where to start, you can check out mine:
Why Saving And Investing Is So Hard
If so few people have extra money to save or invest, there must be a reason right. And usually the simplest reason is correct.
I believe most people don’t have money saved or invested because there isn’t any EXTRA money left over after all the bills and expenses are paid.
According to statista.com, the Average Annual Consumer Expenditures in the US was $63,036 in 2019.
According to Wikipedia.org, the average household income in the US was $63,688 in 2019.
See the problem?
If you happen to be exactly at the average, it takes practically ALL your income to have an average lifestyle. That means no money left over for saving or investing.
Therefore, if you are making an AVERAGE income you’ll need to live a BELOW average lifestyle in order to have any money left over.
And it gets worse.
If you are making less than average income, you’ll need to have a lower than average lifestyle just to survive. That means you’ll need a SIGNIFICANTLY lower than average lifestyle in order to have any money left over to save or invest.
The numbers don’t lie… it is very difficult to have extra money to save and invest.
So, when you do get to the point where you have extra money… it is very important to know what to do with it.
Example Of Saving Money
I stated earlier that I think it is very hard to reach financial security through saving alone.
To show you what I mean, let’s use an example.
Let’s say you are one of the lucky ones and can scrape together $500 extra EACH MONTH to put into a savings account. The most common interest rate for a savings account is 0.01% (pathetic). I’ll be generous and give you 0.05% interest.
Here is how much money you would have after 20 years:
OK, you now have over $121,076 dollars. Compare this to ZERO if you didn’t save at all. In that light, this is not too bad.
But the money you saved ($500 a month for 20 years) equals $120,500. So, you only made $576 in interest.
Now let’s look at the power of investing.
Example Of Investing Money
OK, let’s use the same parameters as above where you are investing $500 EACH MONTH for 20 years. But this time investing and getting an average of 8% per year. (The 8% return on investment over the long term is a common benchmark for investors).
Now we are talking. This is more than TWICE the money you would have accumulated with saving alone.
You contributed the same amount over 20 years, $120,500. But due to the higher interest you made $156,402 extra.
Same $500 a month investment. But with a higher rate of return… twice as much money at the end.
Starting to see how investing can help you reach your future financial goals better than just saving?
How To Build The Wealth You Need
In The Time You Have?
Saving is fine for small financial goals. But if you are going after larger financial goals (like securing your financial future), you are going to need to invest.
Unfortunately, most people don’t have a lot of extra money to invest. This leads to getting a late start investing for their financial future, if they get started at all. And less time to let your investment grow means less profit potential.
So, how can you make the money you need in the time you have?
There is only one solution… Get better than average returns on your investment.
It just makes sense.
You saw the difference between getting 0.05% and 8% returns, right?
So, what if you could invest in a way that has the potential to achieve extraordinary rates of return?
This is exactly what I do…
Over a 5 year period (2017 to 2021), yearly average returns were extraordinary.
Now let’s look at the power of compounding over that same time period:
Are you starting to see how powerful this is. Being able to make a higher rate of return leads to more profits, faster.
This means 2 very important things for you:
- You can make more money with less investment (important because coming up with extra money is hard)
- You can accumulate more wealth in less time (important because most people are getting a late start)
So, if you thought saving and investing wouldn’t add up to much because you don’t have a lot of extra money or a lot of time… doing what I do is a potential solution.
How I Beat The Returns Of
Other Investment Opportunities
I’ll admit it. By the time I figured out how important saving and investing is for my financial future, I was in my 40’s. And since I was getting a late start, I knew I had to make up for lost time by getting better than average returns.
Luckily, I figured out how to do this through Forex trading just minutes a day. Forex trading is now the cornerstone of my investing efforts to secure my financial future.
And before you say, “I don’t want to do that”, let me tell you how easy it is to copy what I do.
- Join Forex Signals Blast Off
- Receive and email Sunday – Thursday between 5 PM and 5:20 PM New York Time
- Follow the instructions
Look, saving is better than not saving. And investing, any kind of investing, is better than not investing at all. Both have a place in your financial plan for a secure financial future.
But if money is tight and you are getting a late start, investing in a way that brings about higher potential profits might be the only solution.
The Real Difference Between Saving And Investing
Saving money has a place in managing your finances. You should have an emergency fund stashed away for a rainy day. And for smaller goals, like buying a cell phone or taking a trip… saving money is the way to go.
But if you strive to reach a level of financial security, you’ll need to invest. And most likely, you’ll need to invest in a way that makes up for lost time.
The real difference between saving and investing is the potential to reach your long term financial goals.
Saving alone is probably not going to get you there. Therefore, you need to invest.
Understanding the difference between saving and investing might just mean the difference between struggling to make ends meet… and having a financially secure future.
- If you don’t save or invest… your financial future is in jeopardy.
- If you just save… you’ll probably not reach your goals.
- And if you invest but don’t have 40 years to watch your money grow… you’ll also probably fall short.
Only through investing, and investing in a way that provides the potential for extraordinary growth, do many of us have the chance of reaching our financial goals.
I hope you now have a better understanding of the difference between saving and investing… and what part they play in your financial planning.
We’ve covered a lot here. If necessary, go back and read this page again before moving forward in the course.
Next up…
To Your Wealth,
Edward Lomax
