Saving and Investing: You Can’t Save Your Way to Millionaire Status
Saving and investing are two essential aspects to a healthy financial profile. It’s important for employees to learn strategies in both areas of money management in order to be secure in their financial lives. Employees who understand and apply skills in both saving and investing can build wealth while staying in their jobs long-term. Rather than leaving their jobs to seek higher salaries, employees can learn to make their money work for them. It’s important for employees to learn not only the difference between saving and investing, but also how, when, and how much to put toward each.
The Difference Between Saving and Investing
The biggest difference between saving and investing is length of time. Saving is for the short-term, such as covering an emergency or loss of income. Investing is for the long-term, such as building a fund for retirement. Saving carries little to no risk since it is primarily a cash reserve and is therefore immediately accessible, hence the short-term use. Investing, on the other hand, is often illiquid and carries high risk with the potential of high returns. In other words, investments can grow over time, but it’s best to leave the money in the investment for a long time to weather any ups and downs in the market.
Having a robust savings fund is important to protect against unexpected expenses, emergencies, and loss of income. But saving alone won’t build wealth. As Alan Akina says, “You can’t save your way to millionaire status.” Even someone who saves aside a whopping $20,000 per year would have to save up for 50 years before reaching their first $1 million. Investing, on the other hand, has much more earning potential and is essential for anyone who wants to build wealth.
When to Save
It’s important to build a robust savings fund before investing. Since financial emergencies and unexpected expenses can happen at any time, savings should be a priority. Additionally, saving makes sense for short-term expenses, such as saving up for a car or a house. This way, the funds are available to make the purchase without the risk of losing the money.
Emergency funds should not be tied up in investments. Instead, they should be secure so they are not subject to market downturns. It’s important to have liquid savings, such as cash in a savings account, for emergencies and unexpected expenses. For example, a real estate investment portfolio might be worth $1 million, but it is illiquid and subject to the market. In other words, the investor doesn’t have access to the $1 million without selling the properties, and even then, the price of the properties would depend on the market and might not necessarily equal $1 million.
When to Invest
Investing is primarily to grow money over time and therefore is best for long-term needs. Because investments carry risk, meaning there is potential loss of money in each investment, a long-term plan allows for ups and downs in the market. A short-term view might necessitate withdrawing money during a market downturn, resulting in a loss, where a long-term plan would allow the investor to wait until the market is more favorable.
Additionally, it’s best to start investing after getting rid of high-interest debt. When debt interest rates are higher than investing interest rates, that money is better put toward paying down the debt. Investing only makes sense when the interest rate earned is greater than the interest rate owed. For example, if an investor owes $10,000 at a 12% annual interest rate, he will pay $1,200 per year. If he can earn a 7% annual interest rate on a $10,000 investment, it’s better to pay down the debt. This way, he avoids the $1,200 interest cost, which is more beneficial than earning $700 on the same money.
While saving and investing might sound straightforward, it can become quite complex. It’s important to have a solid understanding of both concepts in order to create a strategy that works on an individual level. Employees who have access to financial education that teaches skills in both saving and investing will have more success in their financial endeavors than those who are financially uneducated. When employees understand how to let their money work for them, they no longer have to scrimp and save at minimal interest rates that get outpaced by inflation. Instead, they can strategize both savings and investments to let their money grow.
Find out how 101 Financial’s Workplace Wellness program teaches employees strategies for both saving and investing to improve their financial lives.