Saving and Investing – What’s the difference?
Putting something aside every month is a foundation for sound money management and for growing future wealth. But many people get confused around the differences between saving and investing. This article will explain more.
Save for Security – Invest to Increase Wealth
You may have heard the expression ‘Pay Yourself First’. This means that as you receive your income, you take a portion of that and put it aside, before you pay any other bills or obligations.
It’s my opinion that the first priority is to build some financial security. This will act as a buffer against unforeseen changes such as losing your job, ill health or any other life changing event. Having 3 to 6 months worth of income tucked away will allow even the most cautious to sleep better at night.
If you are saving for a specific purpose, such as a holiday or new car for example, create a separate savings account and label it something appropriate. Work out how much the object of your desire is going to cost and divide that, either by the number of months you wish to save or the amount of money you are willing and able to commit to every month. Then set up an automated standing order and forget about.
At the time of writing, interest on savings accounts is minimal, so unless you are planning to save tens of thousands and above, it’s a false economy to spend too much time and effort in researching savings accounts. Go with convenience and something that is easy to set up.
The purpose of investing is to increase your wealth. You are buying an asset of some kind, which will either give a regular return or increase in value over time (sometimes both).
For the inexperienced investor, buying a stock market based investment which tracks the movement of the index is a straightforward option. These can be purchase through many banks or you can open a Stocks and Shares ISA via an investment company such as Hargreaves Lansdown.
Some schemes allow a monthly contribution, so you can build your wealth gradually over time whilst evening out stock market fluctuations. In this way you can set up your monthly payments and fully automate your investing. Of course as your experience and sophistication grows you can look at other options.
Look for funds or options which have low fees, because these can seriously eat into your returns over time. Plus as a bonus, select the option to reinvest any dividends as this will help compound the value over the longer term.
Hopefully that has shed some light on the differences between saving and investing. Both are something that you should start sooner rather than later if you are interesting in both security and improving your financial future.
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If you found this post useful you may enjoy the Fearless Finance Podcast.
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