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Let’s look at the fundamental differences between these two entities:
This seems obvious, but saving money is about setting money aside for a future purpose. It is for money that will be used sooner rather than later.
The etymology of “save” is “to deliver from some danger; rescue from peril, bring to safety,” according to https://www.etymonline.com/. I like this, because I look at savings as a safety-net or cushion to save us from life’s problems. So an emergency fund would absolutely be in the savings category.
Investing money is also about setting money aside for a future purpose, but it is money that won’t be used for a LONG time (as in retirement).
The etymology of “invest” according to the same site is: “use money to produce profit”. This is distinct from “save” because it ISN’T money that will be used for emergencies – it is money that will pay your wages when you stop working. In order to reach a big sum of money, saving won’t be quick enough, investing however gets you there MUCH faster.
So why would you need to save? For what purpose would you save? There is no point in saving for savings sake because that’s the quickest way to losing motivation, plus, your money is not performing it’s best if you have too much of it in cash.
Saving is for:
- emergency funds – e.g. 3- 6 months worth of money that will support you if you can’t work
- big purchases – e.g. weddings, cars
- annual expenses – e.g. Christmas, birthdays, holidays, car insurance
There are plenty of pros to saving!
- You have easy access to the money (as long as you put it into an easy access account)
- Having money in cash is low risk compared to investing
- You know where you are because you can see the total rising with time
- You have easy access to the money (so there is temptation to keep taking from your savings)
- Time weakens the strength of your cash – see this article that illustrates the point
- The bank doesn’t pay much to look after your savings for you
What’s the point of investing? Well if you want any chance of stopping work one day, then you need to invest. If you have a work-place pension, then perhaps for you that’s all you want to do. But if you’re building a business and plan to leave work one day, you’ll need a way to pick up where your work-place pension left off.
So investing is:
- money for your retirement – how much do you need?
- Better rates of return (but not guaranteed to be the same every year)
- More likey to beat inflation over time even with stock market drops
- Money making money babies- your investment money grows with COMPOUNDING!!
- Harder to get access to in an emergency (so don’t use it for emergencies please!)
- Stock market crashes (but there is no need to panic about this)
- Not good for those who have a nervous disposition! You can use this vanguard questionnaire to see how much risk you can tolerate when investing: https://personal.vanguard.com/us/FundsInvQuestionnaire
It’s food for thought isn’t it?
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