February 15, 2015
What is the difference between saving your money and investing your money? Why is it important to do both?
What is the difference between saving your money and investing your money? Why is it important to do both?
Saving your money is when you avoid spending money on things you don’t need. Investing is when you purchase assets that will increase in value over time. It is important to do both because you need to save money in order to have money to invest and you need to invest money to have more money at a later time.
Saving your money has you keep the money you have. If you save your money in the bank and put $1000 in the bank. A year latter you would have $1000.01. Your money does not grow when you save it at the current interest rates. Money grows less then the inflation rate. So if the inflation rate is 3%, your real return is close to -3%. When you invest your money you have potential for it to grow at a rate that is higher then inflation. If you invest your money and you put $1000 in to your investments and you get $1080 at the end of the year then you made 8% for the year. Once you take inflation in to account at 3% you made a real return of 5%. You can save your money as much as you want in the bank and it will not grow for the most part. The bank is not a perfectly safe place to keep your money due to inflation risk. If you want a lower risk investment to save your money in go with bonds that will stay at or around inflation so you do not have a negative real return. Its important to save your money but you should invest that money that you save so you get it working for you and not just sitting somewhere.
The Haag boys did it again. Well said. Let’s recap.
(1) Saving your money is important so you can have money set aside for emergencies and future needs.
(2) Investing your money is important so your money has a chance to grow beyond inflation.
(3) Combining these two into a program of automatically saving and investing in no-load index funds that diversify you all over the world at a very low cost can create a future of financial freedom. Believe in that and believe in YOU.