In many people’s minds, the terms
”
saving” and
”
investing” are almost interchangeable. But there are some big
differences
— and you need to recognize them as you work toward achieving
your financial goals.
In many people’s minds, the terms “saving” and “investing” are almost interchangeable. But there are some big differences — and you need to recognize them as you work toward achieving your financial goals.
You’ll need to save money, as opposed to investing it, for two main objectives:
- Emergencies: You’ll want to have six months’ to a year’s worth of living expenses readily available for emergencies — a big car repair, a new appliance, an unexpected dental bill, etc. You may want to keep these funds in a money market account, which offers liquidity and a rate of return that’s typically higher than a normal “passbook” savings accounts.
-
Major purchases within next few years: Do you plan on making a down payment on a first home or a vacation home within the next few years? Or are you thinking about taking a long (and expensive) trip during that time? If so, you’ll want to choose the right type of savings vehicle. You’ll want to be pretty confident that your principal can be preserved, given that you’ll need the money in a relatively short time. Consequently, you may want to look at certificates of deposit (CD) and other short-term holdings, such as investment-grade corporate bonds and U.S. Treasury securities.
If you’re investing to achieve a long-term goal, such as college for your children or a comfortable retirement, most individuals literally cannot afford to “play it safe” as you did when you just wanted to sock away money for emergencies or for a near-term purchase.
Now, your chief goal is growth — and you may need lots of it.
Save first, then invest.
Brad Ledwith is an investment representative for Edward Jones in Morgan Hill. His column runs every other week.
