Savings vs. Investing

Saving and investing are both crucial elements of successful financial planning. They both serve different purposes and come with pros and cons. In this article, we will compare savings vs. investing and how to best utilize them for your personal finances.

Saving

Saving is the process of putting money aside into a savings account or certificate of deposit. There are many reasons that people save. For example. They save for an emergency fund, unexpected expenses, or a vacation. Saving allows you to meet short-term financial goals and prepare yourself for unexpected expenses, like a car repair or medical bills. Saving involves low risk, but also low reward.

Pros and Cons of Saving

Saving comes with many benefits. These include having a safety net, liquidity, and minimal risk of loss as savings accounts are insured by the FDIC. As with any financial instrument, there are also cons to saving. The cons include low rates of return and the loss of purchase power due to inflation.

Investing

Investing is a way you can grow your money over time through financial instruments like stocks, bonds, and mutual funds. You take on risk for the potential of a large reward. Due to lack of liquidity, investing is usually a way to reach long term goals like retirement, college, or the down payment on a house. When investing you must choose investments that align with your goals, time horizon, and risk tolerance. If you have a long-time horizon, you can take on more risk because you have time to even out the highs and lows of the stock market.

How do you increase the value of your funds? For example, you buy stock in a company. Because of this you benefit from the growth and profits of the business. If the business performs well the value of your stock will increase. Later you can sell your stock for a profit. It is important to note there are no guarantees in investing, there is always a level of risk involved. To help offset this risk you need to make sure you diversify. This means not investing everything in one company. Rather, you should invest in the stocks of numerous companies as well as bonds and mutual funds.

Pros and Cons of Investing

Investing comes with both pros and cons. Some of the pros of investing include the potential for higher returns and the ability to grow wealth through the power of compounding and reinvestment. The cons of investment are taking on a higher level of risk, as well as having the patience and discipline to let things play out over a long-time horizon.

Utilizing Savings vs. Investing

Savings vs. investing does not mean you should use one over the other. Rather you should take advantage of both and utilize them to increase your net worth. Need help with investing? Meet with a Registered Investment Advisor who can assist you through the process.

Questions? Want to schedule an appointment? Contact us by clicking here.