If you have any hope of building significant wealth and achieving financial freedom for yourself and your family, then you need to have a good understanding of the basics. For example, do you know the difference between saving and investing? Many people use those terms interchangeably. But while they are closely related, they are in fact two separate concepts that should not be confused. Let’s take a closer look at each so you can better understand my point.
Saving is the practice of taking your money and depositing it somewhere safe like a checking account, a short term certificate of deposit, or a high yield savings account. Heck, even stuffing twenty dollar bills under your mattress could be considered saving. When you save money you usually do it for a specific reason. You could be saving money to pay for a car, a wedding, an exotic vacation, a down payment on a home, or any number of other things. The goal is to keep your money safe and liquid so you can easily withdraw it when the time comes. Any interest earned on your savings is just icing on the cake.
Investing, on the other hand, is when you use your money to buy something that you hope will appreciate in value or generate passive income. Investments can include stocks, bonds, mutual funds, real estate, small businesses, art, fine wine, rare comic books, and baseball cards.
If you don’t understand the difference between saving and investing, you could easily find yourself making some serious financial mistakes.
For example, let’s say your idea of saving for retirement is to put all of your money in an FDIC insured savings account at your local bank. Interest rates on these accounts are currently less than 1% which means you will have a hard time just keeping up with inflation. At that rate you’ll never be able to accumulate enough to retire!
Here’s another way you could be hurt by confusing saving and investing. Let’s say you are trying to save up for a down payment on your dream home. You know that the interest rate you’ll get on a savings account is downright pathetic so you decide to invest your entire stash in the stock market. And then the stock market takes a nosedive and all of your savings disappear into thin air. Bye-bye dream house.
Or maybe you’re one of those people that use their 401k plan like a piggy bank. They take out so many loans and withdrawals to cover their expenses while they are still working that by the time they are finally ready to retire they don’t have enough money in their account. They made the mistake of treating their retirement account like savings instead of an investment.
The important thing to remember is that if you are going to need the money within the next few years you should treat it as savings. Keep it somewhere safe and liquid so you can access it when you need to. At the same time you should be planning for your future which means investing in assets that will increase your wealth over time.