What is the difference between investing money and saving money? Although they seem to be similar, they mean entirely different things. Knowing the difference and applying that knowledge can help you build your personal wealth.
So many novice investors do not realize the fact that the two have different uses and have distinctive roles in their financial approach and balance sheet. As you begin the adventure of enhancing your wealth and establishing financial freedom, learn how to avoid problems by properly dividing and allocating your money.
A lot of individuals, in spite of having great portfolios, lost everything for not having given sufficient respect to cash in their portfolio. Cash has exceedingly greater use than merely for making more cash.
To appreciate the use of cash, let us see how investing and saving differ.
Defining what Saving Money Means
The idea saving money involves keeping hard, cold cash in a secure place, as well in liquid (that is, easy to access or sell in a matter of days) assets. This includes checking accounts and guaranteed savings accounts. You can also include U.S. Treasury bills or money market accounts, although the latter involves a lot of monitoring work.
Most of all, your cash funds should always be ready to use for your needs; available at any time for immediate withdrawal with the least delay under any circumstances. Most rich and famous investors, including veteran investors who went through the Great Depression, strongly recommend hiding plenty of cash in secret storages even if that will incur a big expense in terms of profit loss.
Although the papers did not carry the news, back in the 2008-2009 market collapse, some hedge fund managers were apparently asking their spouses to withdraw as much cash as possible from ATMs, expecting the whole economy to collapse and limiting the availability of greenbacks for a short period..
After you have ascertained the preservation of your capital should you consider secondary measures for money you have kept in savings. That is, hedging against inflation.
Defining What Investing Money Means
Investing money involves using your money or capital to acquire an asset with the potential of producing a safe and reasonable rate of return, allowing you to build wealth even through volatile periods, which can run into years. Genuine investments have a certain factor of safety, usually in the form of assets or owner returns. From your basic lesson in novice investing, the most productive investments are such assets as bonds, stocks and real estate.
What is the Desirable Ratio between Savings and Investments?
As a rule, saving money should generally take precedence over investing money. Consider it as the foundation over which you will erect your financial house. For a very simple reason: Unless you have inherited a sizeable amount of wealth, your savings alone will generate the capital to support your investments. During the lean periods when you will need cash, chances are you will have to sell your investments at the most inopportune time. Such an event would set you back by a big stretch.
Two major kinds of savings strategies should become part of your financial concern. They are:
- As usually recommended by experts, your savings should be enough to address all your personal needs, such as food, mortgage, utility bills, loan payments, insurance costs and clothing expenses for a period of six months. Hence, in case you lose your job, you still have enough time to cope with the crisis without the daily stress of working for a regular salary.
- Whatever specific goal in your life that will demand a big amount of cash for at least 5 years should be powered by savings, not by investments. In the short-term run, the stock market can be considerably volatile, taking away 50% of its value within a year. Buying a house can be a prime example for saving your money in real estate instead of investing it.
With these things under your belt, you can acquire health insurance as your first line of defense in your portfolio. One possible exception is contributing to a 401(k) plan at your company in order to get free money from your employer’s matching contributions. That is on top of getting a large tax break for contributing to your retirement account. You also have material bankruptcy safeguards for assets held within such an account against any non-payment or default on your part.
Additional Info on Saving Money
Avail of more information on how you can start saving money by reading online materials for beginners on how to save money. Get hold of resources, articles, essays, and lessons teaching you how to save money, how to invest money and how to build your personal wealth. It may seem scary for now, but remember that even successful and rich people began by earning money, living within their means, saving money and investing in ventures that brought interest, dividends or rentals. You can be as good, if not better, than they are. It is all a matter of gaining the same knowledge and wisdom to allow you to act as prudently in handling your money with discipline in order to reap a certain measure of success. In the same way that they did their homework and applied the right principles of money management, saving your own money can be as simple as adding 1 and 1 to get 2.