Saving and investing are crucial parts of a successful financial plan. While saving offers a safety net, investing provides a way to build wealth. Understanding the key differences between the two and when to use both will set you up for financial success.

What Is Saving?

Saving in the process of putting your money aside for future use. If you had a piggy bank when you were younger, it’s the same process. When you save, you can put your money into a savings account or a certificate of deposit. The interest earned on savings is minimal, if anything. It is a low-risk way to make sure you have enough money for a new phone, upcoming vacation, or emergency fund.

Pros Of Saving

Saving offers a financial safety net. If you put a small portion of your paycheck into a savings account each week, you will soon build up enough money to be able to fall back on if it’s ever needed. It’s also a great way to reach short-term goals, like buying a new computer or booking a weekend getaway.

Saving is also very low risk, and there is little chance of losing anything that you put into these accounts. The Federal Deposit Insurance Corporation (FDIC) protects the savings you have in a bank.

Cons Of Saving

Saving is a very safe option but does not have high returns. There is usually no, or very low, interest rates with any savings accounts. Your money may also lose purchasing power if left unused and economic shifts like inflation occurs.

When To Save

If you have any short-term expenses, big or small, it is a good idea to start saving up. Whether it’s buying a new bag that you’ve had your eye on or looking for a new car, savings will help a lot when the time comes.

It is also essential to have an emergency fund saved up. This fund is an amount of money set aside for emergency situations. This could cover unexpected expenses like medical bills or help you if you are laid off or in between jobs. Experts suggest you have three to six months of emergency funding saved up at all times.

How To Start

Most banks should allow you to open up a savings account at any time. All you need is some documentation (an ID and financial statements) and to fill out a short application. If you don’t know where to start, check out the Wells Fargo online savings account application, which needs only $25 to begin.

What Is Investing?

Investing uses the money you have now to make more money. By putting some of your money into financial instruments like stocks, bonds, or mutual funds, you can generate high returns. While investing can be risky, it’s an excellent way to reach long-term goals. This could include investing for college or a down payment on a house.

Pros Of Investing

The biggest pro of investing is the money that you can make. If you invest wisely, considering many different factors and diversifying your portfolio, you have the potential to generate high returns.

Although it is risky, there are ways to make investing a safer option. Investing in secure accounts, like 401ks, and spreading your money out can lower your risk levels. This is also a great way to save up for things in the future, like college funds or retirement.

Cons Of Investing

Just like you can make a lot of money by investing, you can also lose a lot. This is especially true in the short term. Due to this, investing is for the long run, and you usually have to be committed to leaving your money in accounts to grow over a long period to see high returns.

When To Invest

People usually suggest investing in risker accounts when you are younger. At this point in your life, you have time to recoup if things do not go your way, and can also leave investments to grow for a longer period of time. You have the upper hand when it comes to flexibility and the power to compound your investments.

It is also a good idea to invest and save that money for long-term future goals. If you start investing in your early 20s, you can have funds available when you buy your first home or send your children to college.

How To Start

If you are new to investing, there are a few different routes you can go. A good starting point is to invest in a 401k or any other retirement account. It is a simple investment, and many employers offer to match your contributions, essentially doubling your money.

You may also want to consider investing in individual stocks or ETFs. Both of these options are safe for beginners and can produce high returns. Starting out by investing in stocks and ETFs that have done well in the long run (even if returns are lower) is a smart idea.

Takeaway

Saving and investing are both crucial components of any financial plan aimed at securing a successful future. While both options offer distinct benefits, utilizing a combination of saving and investing strategies can help individuals achieve both their short-term and long-term goals. Saving provides a safety net for unexpected expenses, while investing allows for the growth of wealth over time. By balancing the two, you can create a robust financial plan that is flexible enough to adapt to any circumstance.