The Difference Between Savings and Investing - Summer 2009

 

The Difference between Savings and Investing

- Tiffany Vongpukkeaw, July 2009

This may seem like a simple a topic to some, but recent economic events have proven that we should not get too complacent about understanding the difference between saving and investing. First, let’s define each term.

Savings account, is an account maintained by a customer with a depository institution for the purpose of accumulating funds over a period of time. Funds deposited in a savings account may be withdrawn only by the account owner or a duly authorized agent, or on the owner's nontransferable order. The account may be owned by one or more persons. Some accounts require funds to be kept on deposit for a minimum length of time, while others permit unlimited access to funds. Earnings may be in the form of dividends, as in the case of a share type savings account, or interest as in the case of a deposit type account.

Investing, is the purchase of a financial product or other item of value with an expectation of favorable future returns. In general, terms, investment means the use of money in the hope of making more money. Lightly said, with savings you are putting money away for later use, usually in a stable and secure environment with little to no risk. With investing, you are also putting away money for later use, but usually much later, and so are willing to take on the potential for greater risk in return for the potential future reward of greater growth.

Financial advisors will usually tell you that it is a good idea to first start with savings and then move to investing. Build your financial foundation on a strong base, starting with security and moving toward great risk when you are ready for the potential of loss as well of reward.

With savings, a good general rule of thumb for consideration is having at least 3 months worth of your income in an emergency fund. This money would cover any unexpected medical bills, unplanned car repairs, unexpected job loss, etc. It should only be used for an emergency, not for impulsive shopping sprees.

Also, consider having a reserve fund, used to pay for the planned necessities of your life. This would include rent or mortgage payments, car insurance, student loans payments, life insurance premiums, etc.

Lastly, having a reward fund doesn’t hurt. In this fund, you could save for that new car you want, your special vacation, the new designer bag you have had your eye on, or even to plan for the holiday gifts you know you will be buying every year.

There was a time when people preferred to hide their money under their mattresses rather then trust a bank, but even though we have had some real problems in the baking industry this year, a savings account is probably still a better bet since you will earn some interest. Some of the other savings tools you can use to your benefit are Certificates of Deposit (CD’s), Money Market Accounts, and U.S. Savings Bonds.

Moving on to Investing

After you have covered your basic living expenses and saved for both the seen and unforeseen expenses, you may want to consider using any extra money for investments. Remember, investments usually have longer-term goals, like paying for retirement or children’s college.

Note to self: you shouldn’t invest more than you are willing or able to lose.

There are many ways to invest your money, whether you want to invest in hard assets like property, precious metals or antiques, or equity investments through stocks and bonds or mutual funds. Which choice is best for you really depends on the time frame and what you are looking to accomplish.

• Stock: is actual ownership of a part of a company, so how your investment will perform depends on how the company performs. If it flies high, you will likely make money, if it goes under, you could lose everything you put in. Depending on which stocks you choose, you may be very aggressive and experience growth rapidly or look for slower progress.
• Bonds: instead of being an owner, you are a lender. You have loaned the company money and it pays you back with fixed interest in a certain amount of time. The company may provide the opportunity to earn a stream of income over time. This is often the reason that those needing stable income look to bonds to pay out regularly as they mature.
• Mutual Funds: provide professional management by a company that pools investors and invests their money in a diverse portfolio, ranging from stocks, to bonds, and other securities or a combination of investments.

Here are a few great websites that offer their services to help you save and invest!

• www.finra.org - FINRA Broker Check is a free tool to help investors check the professional background of the current and former FINRA-registered securities firms and brokers. It is a resource many investors turn to when choosing whether to do business with a particular broker or brokerage firm.
• www.google.com/tipjar - Tip Jar is a tool that helps you discover and share new and useful tips for saving money in your daily life. With this tool, users find new ways to cut down on utilities bills, plan more cost-conscious vacations, and save money one everyday activities like commuting to work and grocery shopping. Tips are ranked by the web community with the most helpful receiving the highest rankings.
• www.fdic.gov - Read FDIC’s free publications to become a better-informed customer. Site also includes a consumer complaint on-line form if you have a question regarding FDIC deposit insurance coverage, or an inquiry or a complaint regarding your financial institution.

The Difference Between Savings and Investing - Summer 2009