It’s a good thing to have some savings. When you put the money in a low-risk account, you can be pretty sure it will be readily available when you need it.
But “saving” is not “investing” – and knowing the difference could pay off for you far into the future.
Think about it this way: Saving is for today, while investing is for tomorrow.
You need your savings to pay for daily and monthly expenses. In fact, you might even want your savings to include an emergency fund containing six to 12 months’ worth of living expenses to pay for unexpected costs.
Most people typically can’t simply rely on their savings; they’ll need to invest. Why? Because investments can grow – and you will need this growth potential to help achieve your objectives.
To illustrate the difference between saving and investing, let’s do a quick comparison. Suppose you put $200 per month into a savings account that paid 3 percent interest. After 30 years, you would have accumulated about $106,000, assuming you were in the 25 percent federal tax bracket.
Now, suppose you put that same $200 per month in a tax-deferred investment that earned 7 percent a year. At the end of 30 years, you would end up with about $243,000.
This enormous disparity in the two accounts clearly shows the difference between “saving” and “investing.” The latter does involve risks; investments can lose value, and there’s no guarantee that losses will be recovered.
But, if you put all your money in savings, you’re incurring an even bigger risk – the risk of not achieving your financial goals.
The question ultimately isn’t whether you should save or invest; you need to do both. But you need to decide how much of your financial resources to devote toward savings and how much toward investments. By paying close attention to your cash flow, you should be able to get a good idea of the best savings and investment mix for your particular situation. For example, if you find yourself constantly dipping into your long-term investments to pay for short-term needs, you probably don’t have enough money in savings.
On the other hand, if you consistently find yourself with large sums in your savings account even after you’ve paid all your bills, you might be “sitting” on too much cash. That means you should consider moving some of this money into investments with growth potential.
Saving and investing – they’re a winning combination.
This article was prepared by Edward Jones for use by Rocky Speight, an Edward Jones financial adviser in Rocky Mount.