Do You Know the Difference Between Investing & Saving?

No matter your age you need to ensure that you are saving and investing your money if you are going to achieve financial independence. But do you know the difference between the two? If you you're not sure just keep reading and you'll soon find out.

While the terms saving and investing are often used interchangeably, they are distinctly different and usually serve different purposes.

Saving is short-term— within a five-year period and usually with a specific goal or purchase in mind. With saving, your returns on the money set aside is minimal because of the short term nature of the instruments used, ie bank accounts or certificate of deposits.

Investing, however, refers to long-term— greater than five to ten years with the goal of a greater return on your dollars.

The objective of investing is to yield a return on your money over the long-term. With investing, you allocate part of your savings to purchase financial instruments such as individual stocks and bonds or stocks and bonds mutual funds. Over the long term, stock-related investments have demonstrated their ability to outpace inflation.

Inherently, risks come with investing, which means you can expect to see a decline in your portfolio value from time to time, as was clearly indicated over this past year. So, risk is the uncertainty associated with the expected financial gains. And your age, time horizon, risk tolerance and financial goals help determine the ratio of stocks to bonds and cash as you design and build your investment portfolio.

One way to reduce your risk is to keep contributing to your investment on regular basis. This is know as dollar cost averaging - you are allocating a designated dollar amounts on a strict, periodic schedule.

As a rule of thumb you should be setting aside at least 20 % of your income for savings and investing. My suggestion is that you place 5% on savings and 15% in investment.

Got a question about financial or retirement issues you're facing - any question at all. Just Ask Glenn!

Copyright © 2009 - Glenn S. Ferguson