Saving vs Investing Explained with Examples

News & Insights

Saving vs Investing Explained with Examples

18 Nov. 2022

You are saving money by investing sounds like a simple concept. But it would help if you were careful how you apply it. Investing in a mutual fund differs from putting money into your retirement account. Here's why?

When you save money for the future, it has value. You're able to spend it later. But when you invest money, you don't necessarily know when the time comes when the investment will produce a return. And you will see cash flow then. That's why it's essential to consider the difference between saving and investing.

Save Money

You should be saving money right now to ensure you have enough to cover your expenses. If you think about it, it makes sense to save money. You will only use the money you have right now. You can use that money for any purpose.

So if you need to buy something expensive or you want to buy an oversized item like a car or house, you should save some money right now. The first step is to cut back on unnecessary spending. That's the best way to save money. It would help if you looked around your home and office for things you can do without. You should eliminate these items from your budget.

Investment

An investment is a financial investment that is made over some time. The value of an investment depends on several factors. One of the most important factors is the risk involved. Risk is the chance that the investment won't do well. The higher the risk, the higher the return. For example, investing in stocks is very risky.

On the other hand, investing in real estate is less risky. The second factor is the amount of money you invest. The more money you invest, the greater the return. The third factor is the time frame in which you invest. The shorter the time frame, the higher the return. Long-term investments are considered safer investments.

Example

Let's look at a prevalent example: retirement. A retiree might spend $1000/month on living expenses and save $500/month for the future. That leaves $500/month to invest.

In our example, $500 invested over 30 years is worth about $30,000. So it was an investment. But if you saved $500/month for 20 years, you still spent $1000 on living expenses but had $2000 left over. In our example, that would only be $500 invested.

So you can save money in the short term, but it will also be a long-term investment. If you keep your lifestyle in check, you'll be able to invest more of your earnings.

Saving Money vs. Investing

If you follow this simple rule, you can enjoy the benefits of both. You can invest for the long term while keeping your current expenses low. By saving money for the future, you can invest long-term.

If you can find the right balance, there is still time to start saving for the future. Start with something easy, like a 401(k) or an IRA.

Final Thought

I hope you enjoyed this post, and helped you better understand saving and investing. Let me know if you have any questions below!

News & Insights