There is an unbroken connection between saving and investing. These days, a person can hardly talk about one and not the other. But functionally, there is a difference between the two, and as an individual with a prospect for great wealth, you should understand what that is for better financial planning.
What is the real meaning of savings?
Saving is the intent to preserve capital. Supposedly, you are not going to lose money with savings. When you deposit money in a bank, the funds are protected by the stability of the financial institution as well as the Federal Deposit Insurance Corporation (FDIC). If you deposit $500 today, the full amount plus the yield should be accessible to you tomorrow or five years down the road without any losses or obstructions. Investing, on the other hand, is something different.
What is the true definition of investing?
Investing is intended for financial growth, which is always accompanied by risks. In this case, nothing is guaranteed. Hypothetically, if you invest $100 today, you may end up with $150 two years from now or less than $50. The outcome is usually unpredictable, and the less you know about the invested product or market, the riskier things could get.
For most people, investing consists of participating in a 401(k) plan or IRA account, which is diversified through a mutual fund in stocks and bonds and administered by a fund manager. While this method of investing is popular and reasonably safe for as long as the stock market remains stable, most account holders have no clue about what’s happening to their money. The rise and fall (gains and losses) of their investments are dependent on the knowledge and advice of their fund administrator. Thus, the account holder has little or no control over his or her investment, which presents additional risks of possibly losing some or a great deal of the money.
Successful saving or investing requires self-involvement
Ideally, you want to be in a position where you’re preserving capital (saving) and growing wealth (investing) at the same time. However, before getting involved in any type of investment, including making contributions to a 401(k) plan or IRA account, which imposes fees and tax consequences on early withdrawals, I highly recommend that you build up six months of savings for unforeseen conditions or emergencies. That way, you can retain immediate control over your present situation without touching any type of investment program. In this case, access to liquid cash is the key…not interest rates or return on investments. Once this financial component is established, it is only then should you consider taking the next step, which is the possibility of financial growth through prudent investments.
However, before diving into this category of finance, you need to be aware of what’s at stake. You simply cannot turn that aspect of your finances to a fund manager and hope everything goes well. Instead, YOU should figure out how to do it if you want your money to grow and remain safe.
With some knowledge and the right vehicle, you can do your own investing with less risk than a fund manager on Wall Street. Doing it yourself puts you in control, builds self-confidence, and creates the opportunity for great wealth. More on this topic later.
To learn more about your financial options, consider reading my new book: Pennies to Power: How to Use Your 20’s to Gain Financial Independence for Life.
Thanks for reading.
What are your thoughts?
Do you think it is necessary to have money saved for unforeseen conditions or emergencies? Should people bypass the savings idea and depend on credit cards for unplanned financial events? Do you think it’s a good idea to do your own investing or have someone else do it for you?