People sometimes use the terms “saving” and “investing” as if they mean the same thing. And, because both have the same general goal—to create financial stability for you and your family—there are similarities.
But there are also important differences. Saving is when you incrementally add money into a bank account. Goals can include creating a fund for emergencies, saving for a down payment on a house, buying a car, going on a dream vacation, and so forth. This strategy is often intended to reach shorter-term financial goals.
Investing is when you take a portion of your money and buy assets with the funds. You might buy stocks and bonds, invest in mutual funds and so forth, with the goal being to grow your wealth. This strategy is typically used to reach long-term goals.
In this post, we’ll explore more distinctions of saving vs. investing, and share strategies to consider. No one strategy works for everyone, because financial situations differ, as do financial goals and comfort with risk levels. The real question isn’t whether you should save or invest—often good financial strategies include a combination of both.
More About Savings
When saving, money is commonly stored in a savings account. This means the money is readily available when you need it (although your bank may put limits on daily withdrawals).
With a savings account, there is limited risk because the Federal Deposit Insurance Corporation (FDIC) insures each person’s money to at least $250,000; or if you have a savings account at a credit union, the National Credit Union Share Insurance Fund (NCUSIF) insures to at least the same amount.
The major downside to traditional savings accounts is the interest rates may be lower than the rate of inflation. The current inflation rate is about 1.9%, and the most common interest rate for savings accounts is 0.01%. Ultimately, accruing less interest than the rate inflation may actually mean you’re losing money.
More About Investing
Unlike savings, when you invest, you typically have longer-term goals in mind (say, at least five years away)—it could be paying for your children’s college expenses or planning your retirement.
When you invest, there is potential for greater rewards through a higher return on investment. But when you invest, there is not a guaranteed return on your investment, and you can lose part or all of the funds.
Overall, your goal should be to position yourself well financially through debt reduction and savings, and then move into investments, leveraging the potential for greater rewards as a vehicle for growing wealth.
How Much Money Should You Save Before Investing?
If you owe money on high-interest credit cards or loans, it typically makes sense to first focus on paying that down—or, ideally, paying it off. You may consider consolidating this debt into a low-interest personal loan, which will allow you to pay off the balance more quickly, freeing up more cash for savings and investing.
Next, it’s typically recommended that you save three to six months’ worth of living expenses before you begin to invest. This will create a safety net in case of emergencies. As the next step, it usually makes sense to invest in your 401(k) and/or IRA to the maximum allowable amounts. (And, yes! You can invest in both a company-sponsored 401(k) and an IRA.)
How You Can Make Money Through Investing
• Income: This is when your investments earn interest and/or pay dividends.
• Capital appreciation: This can occur when you invest in stocks, real estate, or gold, as three examples; if they go up in value, this is capital appreciation.
• Pass through profits: If you invest in private businesses or real estate, you may earn what’s called pass through profits when their operations are profitable.
Invest in the future–not fees.
Distributor, Foreside Fund Services, LLC
Investing in Stocks
Broadly speaking, companies are privately or publicly owned, and public companies trade shares of their companies through the stock exchanges. So, when you buy one single stock, you’ve bought one single ownership share in a publicly-traded company, and therefore own a tiny piece of that company.
Investing in Bonds
Sometimes companies need an influx of cash. Sometimes, the government does. So, to get that cash, they might issue bonds. A bond is essentially a loan—and you’re the one lending the money. You loan money to the government or a company, and they pay you back in full—with interest. Four commonly-available types of bonds include:
• Treasury bonds by the U.S. government
• Corporate bonds by a corporation
• Municipal bonds by a state or local government or agency
• Mortgage-backed or asset-backed bonds
Investing in Mutual Funds
Investing in mutual funds is a way to invest in stocks, bonds, and more and can be ideal when you’re first investing. Mutual funds contain a variety of different types of assets.
When you invest in mutual funds, you benefit from instant portfolio diversification, which is good in case, as just one example, the value of an individual stock within the fund plunges. There are more than 20,000 mutual funds available to choose from, and this strategy can be simple and inexpensive as you begin investing.
Once your portfolio grows, you might want to diversify into alternative investments, such as real estate trusts, directly investing in businesses, entering into limited partnerships, investing in gold and other precious metals and more.
SoFi Invest® for Your Investment Strategies
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At SoFi, you benefit from a combination of today’s technology, through the use of automated investing, and professional human advisors. And our planners don’t get paid on commission, which means their focus stays on you to create a personalized plan that is tailored to your unique financial goals.
You have the ability to adjust risk tolerance (something not all companies using automated advisors allow). And our human advisors work to help keep your investment strategies on target.
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