Personal finance is a very underrated concept. It has an all-encompassing impact on an individual’s life. Yet, few actively try to be better at it. In fact, nearly two-thirds of Americans don’t expect their finances to improve anytime soon. Weakening finances are a leading cause of stress. To manage your income better, getting a grasp on the fundamental nuances can help you establish a strong foundation of knowledge, from which you can further build on whether it’s through more personal research or undertaking online MBA finance programs.
People often use the terms ‘savings’ and ‘investing’ interchangeably. While they might seem similar, they are inherently distinct concepts with intrinsic differences.
What is Saving?
Imagine filling a bucket with water. You have heard that there might be repair works in the next few days, so the water supply might be cut out for a couple of hours. The water quantity does not change much. However, it is very easy to access and can be relied on in case the supply does get cut.
Saving is like conserving that bucket of water. You set aside some funds for emergencies or short-term goals. It does not dramatically increase in value, but you can easily retrieve it for immediate use. However, the downside is that savings don’t grow by a decent margin, they remain fairly constant, just like the water in the bucket.
What is Investing?
Now consider planting a tree. You plant it intending to get something in return in the future. It could be fruits. It could be a reprieve from the scorching sun. Or it could also be keeping the soil firm against erosion. You can’t expect immediate returns, but in the future, it could be very beneficial.
Investing is like planting a tree. There is a growth in the sum invested if done correctly. Like trees, depending on the environment, investment too depends on market conditions for conducive growth. There is an element of risk too. The tree, just like the investment, might wilt and not grow at all. Another thing to factor in is that money invested might not be immediately accessible. So in times of crisis and emergencies, invested money might not be helpful.
Where Can You Save and Invest Money?
There are multiple avenues to park your funds and either save or invest.
To save, you can consider options like:
- Traditional savings accounts at institutions like Bank of America and Chase.
- Government securities like Treasury Bills, Government Bonds, and Notes.
- Employee Sponsored Savings Programs for retirement funds.
- High-yield savings accounts at fintechs like Ally Bank, and Marcus by Goldman Sachs.
- Certificate of Deposit at traditional banks.
To invest, there are multiple asset classes such as:
- Shares
- Mutual funds
- Exchange traded funds
- Bonds
- Index funds
- Real estate
- Gold
- Cryptocurrencies
- Peer-to-peer lending
- Commodities
How Can You Balance Saving and Investing?
Saving up all your money and not investing anything will lead to subpar growth in money. On the flip side, investing all the money can be very high risk and also provide limited access to funds in case of urgent need. Hence, it is important to balance out the two. Having a clear intent can solve this conundrum. Both saving and investing have distinct intentions and objectives behind them.
Saving is the preferred mode when the objective is:
- Building an emergency fund
- Funding a trip or vacation
- Downpayment of a car or home loan
- Home improvement project
On the other hand, investing can be a better pick when the aim is:
- Retirement money
- College/education fund
- Starting a business
- Downpayment for a house loan 10+ years down the line
- Family finance planning for children or spouse
It can be observed that savings are more suitable for emergency and short-term use cases with a period of less than three years. For plans beyond three years, investing should be the preferred option as it would generate real return through the compounding effect and snowball into a much larger amount. If you have limited experience in dabbling with investments, you can start by seeking the help of trusted professionals and slowly learning your way to start investing on your own.
Managing personal finance can seem like a daunting prospect. However, with clarity of thought and willingness to learn, any challenge can be vanquished. It is important to be disciplined in your investing or saving journey and stick to the course. Being clear about your goals and staying true to them can pay off handsomely in the long run.
