Is there a difference between saving money and investing money? Yes. A major one. For some it’s completely lame to store money in a savings account. Savings accounts earn very little interest and so many “great investment opportunities” will come along as your money sits in a bank account. Investing your money is a much more attractive option. I have a friend that’s always brewing up ways to invest money. Whether it be buying season tickets to a sporting event or trying to find a property for cheap. Saving money seems too boring. Investing your money and becoming the next Warren Buffet is definitely more appealing.
Let’s compare saving money to investing money…
Why investing money works?
I want to highlight the benefits of both options so that you can see which strategy for accumulating wealth is ideal for you. I will start off with investing money.
Investing is more challenging.
It’s much more of a challenge to conduct the research and take the risks that go along with investing your hard earned money. It instills a greater sense of pride within you when you figure out how to make money with your money. This challenge is very motivating. It motivates you to earn more money and to take more risks. This motivation is what will get you through the late nights and early mornings.
The rewards are greater.
We all know how it works, the more risk you take on, the greater the potential reward can be in the case of a successful outcome. You can play it safe with a savings account or you can risk your savings in hopes of exponential growth.
Why saving money is excellent for getting rich over time?
With the positives mentioned of investing your money, I need to stress that you run the risk of losing a portion of your money if an investment goes south. Keeping money in a savings account on the other hand, can be an ideal option for those of you that are afraid of risking your money because:
Saving is safe.
Savings accounts are FDIC insured and you can sleep at night knowing that your money is safe. You can easily access this money and you don’t have to worry about losing any of it at all. You can live your life knowing that you know your savings will be there when you need them.
Saving money is passive.
When you store your money in a savings account you don’t have to worry about managing it. You don’t have to track the trading price or be on alert for press releases. Your money is stored in an account and you check up on it whenever you feel like seeing how much money you have saved up. You can essentially go with rarely ever tracking your savings.
Now that we went over the reasons why both investing your money and saving money can do great things for your financial future, which strategy will you choose to get rich?
I just feel very safe and comfortable with having a set amount of money in my savings account. This is liquid cash that I want to be able to access at any given point in time. You can call it an emergency fund. You can call it a “in case shit happens” fund. Either way I need to have a set number in my savings account at all times. With any other money that I manage to accumulate I’m willing to take on some risks. I’ve dabbled with stocks, mutual funds, and most recently a condo. I’m willing to take on financial risks with only a certain piece of my savings.
What’s the major difference between saving and investing? Risk. There’s always going to be some risk with any investment idea that you choose to pursue. Saving your money is always the safe route to take if you don’t like risk.
Do you save or do you invest?
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I think that saving is something you should do when you’re young and just starting out. You should strive to increase your savings rate and accumulate enough cash before you start to invest.
If you only have a few thousand dollars it’s not worth it to invest. Even if you manage to double your money you still only have a few thousand dollars and now you have to try and figure out how to repeat that performance.
Build up your savings rate over time and when you have enough cash then you can figure out what you want to invest in.
Thanks for the comment Echo. You’re right about that. I’ve had friends ask me what I think they should do with their $1,000 in savings and I tell them to go on a trip. When you’re starting off it’s best that you try to accumulate a good chunk of change before you start looking into investment opportunities.
At what point do you feel one should begin investing?
I would say to save $5k or $10k in a high interest saving account (within your TFSA) and then switch to a low cost index fund and make regular contributions every month. Once you have about $25k or $30k then you can consider individual stocks, but make sure your trading fees don’t exceed 1% of the transaction cost.
What if someone is too impatient to wait until they have over 25 grand saved?
If you’re too impatient then you can sign up for an online discount broker like Questrade where the trading fees are lower and take about $5k or $10k to buy a few different stocks.
$25k is optimal if you are with a big bank, since they waive their discount brokerage annual fee at that point. It also would provide a bit more diversity to your portfolio.
I definitely agree with all of your comments. Saving when your young, helps you learn valuable lessons concerning the value and worth of money. Investing on the other hand would promote gambling-like activities at a young age, because most young people do not have enough intelligence nor experience investing wisely.
That’s true and the last thing we need is to develop gambling-like tendencies when we are new to the world of money management.
Actually, I recommend both. You need to save and keep that money in a safe money market for short term goals and emergencies. For the long term, you have a greater likelihood of amassing wealth if you “invest” especially in a tax favored vehicle.
Thanks for the insight Barb. Do you have any specific examples you would like to share as investment ideas?
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