In my wealth management practice I have come across many different types of clients. Some are savers and some are investors. It’s not that one is necessarily better than the other, just different. However, sometimes investors take on a saving mentality by being too conservative, and savers sometimes take on an investing mentality on short term goals trying to get higher returns.
The difference between saving and investing.
Saving should be reserved for shorter term needs where the money absolutely has to be there. Savers will not be able to endure any fluctuation in the principle. Typically the time horizon is less than 5 years.
This account should also be guaranteed against loss and should pay interest. Don’t expect to get rich from the interest. Remember, this is a short-term vehicle, and rates aren’t high enough to matter anyway. So stick with money markets, CDs, and savings accounts.
You should save money for two reasons:
Short-term goals-You could be saving for a goal like a down payment on a home or car. It could be a major purchase like an appliance or computer for your home. Saving for these type of goals will allow you to bypass the plastic and pay cash.
Emergencies-A rainy day or emergency is another reason you should save money. Most planners, including myself, recommend that you have at least 3-6 months of your current expenses saved in a savings account or money market. In difficult economic times that number should increase to 6-12 months. That way you have a cushion in case of a job loss or major illness.
Investing is similar to saving but with a longer term horizon, typically over 5 years. Investors can tolerate some fluctuation in the value of the principle. Investing in the stock market usually involves greater risks and the potential for loss of principle. So this is not a place to put short-term savings that you will need in a year or two.
Investing is for goals that require large amounts of money as well. Retirement and college expenses are two examples. It will be much more difficult to achieve these goals with a savings account that is paying less than one percent. Concern for investment losses convinces some long-term investors to behave like savers.
Investing requires the use of a portfolio of investments. These can be anything from stocks, bonds, cash and alternative investments. So your portfolio is a collection of funds that you choose to invest in. Investing in more that one vehicle is important because it will allow you to offset your total risk by not putting all your eggs in one basket.
Saving and investing serve two different purposes all together. One is for short-term needs and emergencies, the other for long-term goals and wealth accumulation. If you would like some help getting your financial house in order, feel free to write me at at email@example.com or call me at (859) 225-2596.