Saving vs. Investing: What's the Difference?
Many equate saving with investing. Yet the two concepts are not entirely interchangeable, there is a difference between saving and investing. Saving is putting money away that is for later use with little to no risk of loss. While you save in order to invest, you then take on some risk by investing in assets which ideally will increase in value but that doesn’t always occur. Here are some of the key differences to understand.
Savings are typically held in federally insured institutions, meaning your money is safeguarded by the Government up to $250,000 per type of account. Another option for cash savings is savings bonds which also carry very little risk. These assets are typically very liquid and readily available. So why wouldn’t a person just save and keep all their money safe and secure? Two reasons. The first is that cash savings can only be secured up to so much. For example, if you have $1,000,000 in savings you must spread those funds out into differently titled accounts and potentially at different banking institutions to ensure that the money is safeguarded. Secondly, cash savings lose buying power due to inflation. As an example, $10 now does not buy as much as $10 ten years ago or 50 years ago.
This is where investing comes into play. Once your savings have reached a level beyond ‘emergency’ savings/additional liquidity savings, funds should be invested to combat inflation. It is prudent to take on some risk in a measured way in order to then grow your savings. Mutual funds and Exchange Traded Funds share the risk across a variety of companies and industries, so are less risky. If one company's stock drops, your whole investment won't be affected. Other investments such as real estate holdings, gold, penny stocks or private equity face much higher risks than savings.
With this in mind, you must balance the amount of risk you are taking for the given reward. In this instance, the average individual should seek out the professional advice from a trained advisor.