Saving and investing are both good personal finance concepts, but it is important to remember the difference between the two.
The difference is similar to the concept of being “not poor” compared to being “rich.”
What is Saving?
Saving is the act of preserving income for a future use; or an amount of income that is not currently consumed. After the act of saving you may choose to place the money in savings or investments.
This could include your normal savings account and also short-term certificates of deposit.
There is a general belief that saving consists of minimizing risk by putting your money in a safe place where you have instant – or almost instant – access to your money when you need it.
What is Investing?
Investing is the process of using money (called “capital”) to buy an asset that is intended to help generate a safe and acceptable return over time, making you wealthier every year.
An investment can include anything from:
- Fine art
- Comic books
But the more common ones include:
- Mutual Funds
- Real Estate
What Investing Is Not
There is another general belief that investing is extremely risky as it consists of taking risks with your money by placing it somewhere it could either be diminished (or lost), or it could increase substantially.
It is also sometimes associated with “gambling” by the amateurs as well.
Truth is, investing is NOT gambling. Gambling is placing money at huge risk by betting on an uncertain outcome with the small hope that you may get lucky and strike it rich.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson
The main reason why some people confuse investing and gambling is partially due to the way which some people approach investing. For instance, if you were to invest in a stock merely because of some “hot tip” which you overheard from a friend, that can be compared placing a bet at a casino.
However, true investing doesn’t happen without research on your part.
A “real” investor does not simply gamble money at any random investment. Instead, there’s real research and analysis to be done. Moreover, an investment is only made when there is a reasonable expectation of generating a positive return.
While there is no doubt that there are still risks involved with all forms of investing, but investing is more than simply hoping Lady Luck is on your side.
So Which Is More Important?
You definitely want to include both saving and investing in your personal finance plan, however savings alone will never give you the financial security you want or need.
If you have savings as a large portion of your personal finance plan, it is important to understand the effects of inflation.
The inflation rate in Singapore (2011) is pegged at 5.7% and growing.
When you put your money in a savings account in a bank, you get a measly interest of around 0.2%.
Which means to say as the money in your savings isn’t growing with inflation, it’ll be worth much less as time passes. That is equivalent to a definite loss in your money.
On the other hand, while utilizing investing in your personal finance plan offers a possible loss, it is accompanied by a possible gain – possibly a BIG gain.
And more importantly, investing actually puts your money to work for you. Essentially, it’s a different way to think about how to make money.
When we were growing up and in school, most of us were taught that the only way to earn money is to work hard in your job.
And sadly, that’s exactly what most of us do.
The big problem is with just relying on your job for income is: The only way to get more money is to work more hours.
However, there is obviously a limit to how many hours a day we can work because we all have only 24 hours a day.
In the first place, having loads of money is no fun if we don’t have the time to actually enjoy it.
Just remember that:
[font family=”georgia,palatino” size=”22″ color=”1E00DE” textshadow=”0″ alignment=”center” weight=”bold” style=”italic” lineheight=”110″]Both saving and investing requires commitment.[/font]
With savings, you must set aside money to put into a savings account, or other “safe” place; and to leave it there unless there is an emergency, or you have reached the goal your savings were intended to meet. (Such as a new car, house, boat – or for retirement.)
With investing, commitment is required to allow your money to be removed temporarily from a place where you have immediate access and total control.
Still, individuals must decide the level of risk he/she is willing to take within their personal finance plan. Undoubtedly, there is a certain feeling of wellbeing that comes with saving money; an emotional comfort in knowing exactly how much you have and where it is.
Regardless, everyone must remember that savings alone will never be enough.
Gone are the days when everyone stuck to the same job for 30 years and then retired to a nice fat pension.
For average people, their savings will not even be enough to cover their retirement, much less ensure they become wealthy.
Thus, investing remains the ONLY way to ensure you can retire and still maintain your present lifestyle.