As you begin your journey towards financial independence, you will eventually come up with these two – saving and investing. It is important that you understand the difference and the basics between the two. By definition, both are totally unrelated to each other, yet most of the time, people are confronted by these two words. Although they may be unrelated and their processes are different, the one thing that puts them together in one room is money. In order to make things simple, it important that these two are first defined so their differences will become much clearer.
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Saving – this is the process in which you store away cash in a safe environment (i.e. bank). The main benefit of savings is that you are able to access your funds quickly and without much hassle. If your savings is in a bank, you will be able to have access to it within just a few hours at most. Most people store their savings in a bank (especially if they do not plan on using it for a long time) as opposed to just placing them in a safety vault at home is that it earns interest in a bank. The process of compounding interest rates when money savings are deposited in a bank on a long-term period is that the interest the initial deposit earns accumulates and thus grows. - Investing – this is the process in which you use your money to buy assets which you assume will generate a return after some time. This in turn can make you wealthier with every passing year. Investing is actually a very wide field which is why not many people are suited to it. Investing can range from buying real estate, stocks, bonds, antiques, mutual funds, gold, rare wine, fine art, and many more. For business minded people, investing can mean financing a business, either solo or as a group to accumulate more funds. You will often hear about people striking it rich due to good investments. However, investment is also a risk because you will never know if you will have a profitable return or not. Sometimes, bad investments can even make some people go broke.
When it comes to both saving and investing, usually, saving comes first in order to accumulate the funds needed for the investment. This is of course unless your family is very wealthy and you are given sufficient amount of funds to invest on, then the term saving is literally non-existent.
On the initial question on whether to save or to invest, the truth is this is usually up to the person who has the money. After you have saved and still have enough savings left even if you invest half of it is literally up to you on how confident you are on what you plan on investing on or whether you are willing to take a risk on perhaps an unproven market. Of course, the best course of action should you plan to invest is to never go for broke. Always keep a safety line so that if your investment goes bad, you will still have enough savings to grab on to should you lose your job.
