How is Investing different from Savings?
Savings is when you set aside money that you don’t spend but you might add to monthly or whenever you can. It can be for emergencies, a big buy, or for later down the line. You want to have access to you when you need it. It’s a safety cushion for whatever life throws at you. You'd have your money saved in a low-risk bank account. That offers the highest annual percentage yield.
Back in the day having a Savings account at a bank held more value because you had more incentives. You would have an interest rate that could grow your account. Depending on how long you kept your money in the account. Those days are unfortunately gone. With most banks offering little incentives for you to want to store your money in them. I find that online banks offer you the best in a higher percentage yield.
Other than a Savings account you can also put your money in Money Market Accounts and CDs.
What are Money Market Accounts and CDS?
Money Market Account
A money market account works like a Savings account. But you have to have a minimum amount deposited. You also have a certain number of withdrawals a month. Which is good if you need money from it. They used to be competitive with regular Savings accounts. But, now the interest rates can be pretty close. With a Money Market account, money is insured through Federal Deposit Insurance Corp. or the National Credit Union Administration. Even if the financial institution goes under your money will be safe.
CDs stands for "Certificate of Deposit"
A CD is another type of federally insured savings account. With a CD you have a fixed rate of interest and a fixed date of withdrawal or the maturity date. Unlike Money Market and regular Savings. With CDs you’re agreeing to leave your money in the bank for a set amount of time. You can’t access it without paying a fee. This is the term rate and it can be short or long. The longer it is the higher the interest rate. The standard range is 3 months to 5 years. In this case, the interest is usually higher than the other options but you don’t have access to your money as fast.
Investing is when you put your money into buying assets. With the hopes of achieving a higher return in the future. Since you expect a higher return, investments carry more risk. Investments include stocks, bonds, mutual funds, Exchange Traded Funds (ETFs), and Real Estate. You can usually start investing in brokerage accounts like Robinhood and WeBull.
When investing remember that this is for the long term. You want to get in the mindset that you are keeping your money in your investment for a few years. That is how you can make your money grow. If you are going to need your money within a year or two. You might not be ready to jump into long term investing. But as I always say, know yourself.
I’m a strong supporter of investing your money in an asset instead of putting that money only in a Savings account. Especially since overtime inflation will cause the value of your dollar to drop. Yet, if you decide to put that money to work in stocks or mutual funds. Then you are beating inflation if you invest. Whereas in a Savings account you’re not moving fast enough with interest to beat inflation.
If you are wondering what I mean by inflation. It’s how when you were a kid a candy bar cost $1 but now as an adult, it costs $1.20. Inflation is a rise in the general level of prices related to an increase in the volume of money. Resulting in the loss of value of the currency.
Which option is best for you?
The goal of Savings and Investing is the same. Both strategies accumulate money. That’s the goal here, you want to make sure that you have money in the long term. You want to create a safety net.
You realize that it’s important to have access to money when you need it in case something happens in the future. I do think that both Savers and Investors should have an emergency fund whether in a bank account or piggy bank. In case something happens. I don’t think all your money needs to be in a Savings account.
Savings and Investing are not the same. When you think Savings, think Bank related. It’s safe but returns are low. When you think about Investing think stocks, bonds, mutual funds, etc. It’s riskier but the returns are high.
Again, know yourself. Here is a suggestion. If you have time to let your money grow (as in not messing with it for 3-5 years) then invest it. If you have a lot of financial obligations and will need money within the next few years, then put it in Savings.
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