Saving vs Investing

The terms “saving” and “investing” are often used interchangeably, but there are important differences between the two.

Saving provides money to cover emergencies and short term goals – such as car repairs, medical expenses, a new refrigerator, and holiday expenses. Money for these types of purchases should be in a safe account and readily available when they are needed. For emergencies and purchases less than 6 months away – a savings account is likely to be the best place. For goals that are more than 6 months away, certificates of deposit may be an option. Savings accounts do not earn much interest but the money will be there when needed. It helps our financial stability when we can turn to our savings accounts for items such as unexpected medical expenses or new appliances instead of relying on high cost loans or credit cards.

Savings accounts come with little risk of losing principal. But they do come with the very likely risk of not keeping up with inflation. Over the long haul investment products usually provide a higher return than inflation enabling us to retain our purchasing power and achieve long term financial goals. In addition, there are investment products that come with special tax advantages. That is why for long term goals such as funding retirement or a child’s college education, an investment product with tax advantages is a better option than a savings account.

However, investment returns are not guaranteed and even the principal can be lost. So the first place to start is by making sure we set aside enough money in a savings account to cover emergencies and short term needs. Of course we also need to make sure high cost debts are being paid off. Saving and paying off high cost debt provide a nice solid financial foundation. The next step is to start building net worth by investing for long term goals.

University of Florida, IFAS Hillsborough County Florida
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