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Saving and investing are not the same thing — though people sometimes use those words interchangeably. Knowing the difference, and when to choose each, can help you reach your financial objectives. In the end, a mix of both may be the optimal strategy.
When you are saving, you are concerned primarily with securing your money, while not losing any of its value. Typically, savings are earmarked for an emergency or a short-term goal. While saving money may preserve your money’s nominal value, opportunities to grow your money are limited.
When you're investing, you give your assets the potential to grow over time. You typically reinvest your interest, dividends, and capital gains earned. Often you are prepared to take a little more risk with investment money than you are with your savings. With the opportunity for growing your money comes the risk that your account value may decrease. If you have many years before you need the money to reach a goal, such as your child's college education or your retirement, you may have time to recover from small decreases in value.
When you save, you may want to consider a low-risk place to put your money. Depending on your choice, you might earn interest or you might not. How much interest you earn may be less important than preventing any loss of money or having access to your money on short notice without penalty.
Here are potential choices you may want to consider for your savings:
When you invest, you are buying an asset that you expect to grow in value. Since the value may fluctuate, it’s best to invest money that you probably won’t need in the near future. You will want to be able to sell when the market conditions are favorable, not on short notice.
You have a host of investment choices, including:
Find investments that fit your goals, time horizon, and risk profile. If the investments you choose make you nervous or uncertain about your future, you may be in an investment profile that’s too aggressive for your risk tolerance.
Getting the most from your money means understanding the difference between saving and investing — and how to use both. Saving alone may not provide the opportunity to grow your money at a sufficient rate. Yet, relying solely on investing could leave you without easy access to enough money in an emergency. Understanding the difference between saving and investing helps you put your money to work toward your goals.
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Source: Iowa State University Extension and Outreach website, “Money Mechanics.” Last modified April 2008.
This information is provided for educational and illustrative purposes only.
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