Saving vs. Investing

Whether you plan on making a big purchase in a couple of years or you want to put some money away for an emergency fund, saving is an integral part of the process. At the same time, saving money will only get you so far in your wealth-building journey. If you want to build real wealth faster, investing is the best way.?

That poses the question, which one should you focus your efforts on saving or investing. And that is exactly what will be answered in this article.

What’s the Difference?

Saving can be defined as setting aside money and placing it in a safe place (accounts, securities, under your mattress). This money is also liquid, which means that you can gain access to it quickly.

These funds are available for you whenever you need them in an emergency or for a large purchase, such as a house. Having a certain amount of savings set aside is important because it will keep you from getting into a financial bind.

On the other hand, investing money is using it to buy assets that have a reasonable probability of generating more money for you over time. Investing also has some associated risks to it, in that you have the potential to lose money if an investment goes wrong.

A true investment is backed by a certain measure of safety in the form of property or an asset like stocks, real estate, bonds, ownership of a company, etc. Investments allow you to make your money work for you rather than the other way around. In the long run, investments will enable you to build your wealth much faster than saving alone or relying solely on your earned income.

Which One is More Important?

The importance of saving and investing is directly related to the person earning money. It all depends on your current financial state and your financial goals. If you don’t have any money set aside as an emergency fund or “Peace of Mind Account,” then it is highly likely that saving is where you should focus your efforts first.

Both are important, but at different times in your financial journey. Saving is almost always the first priority. Setting up your “Peace of Mind Account” with at the very least $500 is always a good idea to make sure you aren’t living paycheck to paycheck.

Also, if you need cash in the next few years for a down payment on a new house, an annual insurance premium, etc., you’re better off putting that money in a savings account.

When Should You Start Investing?

Investing is most effective when you don’t need to rely on that money to get by. For example, investing will not do you any good if you need that money to make your rent payment this month because invested capital is not very liquid.

The optimal time for investing is when you have a good cushion from your “Peace of Mind Account” of 3-6 months of your living expenses. If anything unexpected happens with your job or a car needs repairs, you can rely on that saved cash until you can restabilize your finances.

Another good indicator that you’re at a great place to focus on investing is when you don’t have any high-interest debt like from credit cards. Making an 8% return on a $3,000 investment won’t mean much if you have a $3,000 credit card that you pay 20% interest on — you’re just losing money here.

Once you’ve covered those bases, the more money you can put into your investments, the better. Retirement can come around a lot quicker if you can put a decent chunk of money into your monthly investments.

If you have $1,000,000 in your investment account, you can live off of 5% of that every year until you die without needing to work again and still be making money from it. So if you went super hard with your budget and were able to invest $1,500/month from the time you were 25, you’d have that million at 46 years old.

An extreme example, but it’s possible, and you wouldn’t even have to budget too hard if you started a business on the side to supplement your earned income. Even if you just had a spouse and each made $40,000 a year, it's pretty simple. That doesn’t mean it’s easy, but it’s possible if you want to retire in half the usual time.

The Bottom Line

Saving and investing are both significant parts of building wealth. They work together, and both need each other to work most efficiently. If you do both effectively, you can see your nest egg grow exponentially faster than if you were to only rely on one.

As I said, though, it all depends on your goals. Not everyone wants to retire early, and that’s okay. If you want a comfortable retirement at 65 years old, it, in theory, just takes $300/month over 40 years with a 9% annual return. The most important thing is to be clear on what you want. Then you can develop a plan that will get you there effectively and build wealth your way!