financial plan

What Is The Difference Between Savings And Investments

savings and investmentsI read a lot of articles and blog posts in the personal finance niche. And I’ve noticed a lot of people blur the lines between what they mean when they save “savings” and “investments”.

For example, I just read an article about where to save your money.

Here is an excerpt from the article:

 

 

 

“When it comes to saving your money, the two important factors are risk tolerance and liquidity. If you have lots of cash in a checking account earning 0.01%, it’s in your best interest, to well, earn interest on it. Whether a savings account, certificate of deposit, or mutual fund seems most appealing to you, as long as you understand the use case for each, and the associated benefit, you’re likely to put your money to good use.”

 

Read source article

The point is, if you have money sitting around, you are saving it for later use. And if you are saving it for later use, you should put that money to work for you to earn more money. And that sure sounds more like investing than saving.

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So, as far as “savings” is concerned, putting your money in mutual funds seems to be more like investing for me.

You’ll see this a lot with retirement planning as well. There are equations to figure out how much money you need to save in order to retire with enough money. But then they talk about getting an average of 6% per year. So, again, this is not just about saving money, but about investing your money so it makes you more money.

Sometimes it can be hard to distinguish between the use of the terms savings and investments.

Here is how I look at it…

If I am INVESTING money I want to get the biggest return on my investment possible.  This means I need to take risks, because the truth is, you don’t get good returns without some sort of risk.

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Trading the Forex market like I do, I want to see higher returns that can beat the markets and bring in yearly percentages greater than 8%.  Not only do I want to be compensated for my time and effort, but with greater risk comes greater potential reward.

On the other hand, if I am SAVING money I want to keep the money accessible and the risk low. I’m not looking to aggressively grow my money, but rather store value.  This means I want to save it in a place that can beat inflation of 2%-4%.

So, I agree, you should not have a bunch of money sitting in your checking account doing nothing. But you have to decide what you want to do with that money to bring in more money.

  • Investments tend to carry more risk, and therefore more potential gains.
  • Savings should be less risky, and therefore the potential gain will be less.

The point is to have a plan.  

 

  • The first step is to combine your income and budget in a way so you have “extra money”.  
  • Then you should invest to put your money to work for you and bring in more money.  
  • And then, at the end of the process you should save your money in less risky places to create financial security.

 

Make sure you understand the difference between savings and investments, and have a plan for each.