There are many misconceptions between Savings and Investing.
For most people, savings is a more familiar method than investing because it feels safer.
This is due to the simplicity of the meaning of savings which basically means putting some money aside for a particular goal.
Investing on the other hand, is perceived as more complicated to understand, but very similar to savings in the sense that you are putting money away, but the goal is not to spend it in the near future, but instead to create a stream of income for the future and get the money to grow over the long-term.
Some examples of savings could be putting money aside for:
- Expensive purchase.
- Wedding party.
- Home Down-payment.
- Emergency Fund.
In order to be able to save money, you need to spend less than You make.
Do not save by expanding your spending limit by using credit and figure out later how to pay it back sometime in the future with interest.
This strategy ends up costing more making little financial sense and create the the trap of enslavement.
Why would I invest the money I save?
When you put the money on a bank account, unless it is earning the same or more interest percentage than the rate of inflation every year, it is then losing value.
That means, that if you save $100 in your checking account and don’t touch it for a year in an economic environment where inflation is 2% annually, at the end of the year your $100 are really worth $98.
If you invest the same $100 in the market for example, you can at least can get 8% annually which is the historic average over the long-term.
This means that your money will be working harder than if you left it in an account losing value to inflation.
What if I save the money in a savings account?
Most commercial known banks will not pay enough interest in today’s environments. The most you can expect is around 0.10%. If you use Online Banks such as Discover, Capital One, among others, you can get around 1.50% interest in your savings account with no downside and the same protections, more features, and fewer restrictions than typical physical banks.
They can do this because they don’t have the overhead costs associated with physical branches and personnel, but you still have total control over your money anytime and 24/7 customer service.
But even if you can get 10 times more interest in an Online Bank than a Physical Bank, you can get more return over money in the long-term if you invest in the market.
Does that mean I should invest and have no cash?
No, you should have a mix of the two according to your goals.
For example, you may want to build certainty and fun with an emergency and enjoyment fund (short-term) and build your retirement through investments (long-term).
You could also have additional non-retirement investments with intermediate goals in between. In this way you can diversify your goals into Buckets of Focus.
What is the point of saving money?
The point of saving or investing money is to optimize money performance, plan for the future, develop a strategy, anticipate future situations such as retirement, build stability and certainty, pursue independence, have more control over your future, and overall financial growth the same way you may want it in other areas of life such as health, relationships, time management, career, mission, spiritually, etc.
Related post Investment Strategy.
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