The terms “saving” and “investing” have, in the past, been conflated, but there are critical distinctions between them. While it is accurate for someone to say, “I will save money so that I can invest in my future,” the two financial planning concepts are entirely different and have different purposes.
Any continued use of the term saving when the user meant investing probably stemmed from bygone decades when the interest paid on a savings account was more significant than it is today. The U.S. national interest rate for a savings account in January of 2010 was 0.21%. From 2013 to 2018, the interest rate for savings accounts stayed steady at 0.06%. For the week of February 24, 2021, the national average interest rate for savings accounts was 0.07%. As you can see, putting money in a savings account can hardly be considered an investment.
The purpose of a savings account is to provide access to cash should an emergency or an unexpected opportunity arise. And investment, on the other hand, is designed to build wealth.
The best advice for building a secure future begins with a savings account. Each person or family should have six months of savings in a bank. This strategy will give them access to money they may need quickly. Additional discretionary funds will better serve them when invested.
After accumulating the cash needed to cover their mortgage and other living expenses for six months, investors should look for opportunities that will provide a higher return than a bank savings account. The first place to look when trying to shore up your financial position is your high-interest credit cards. It would be uncommon to find an investment opportunity that pays a higher return than what you are paying your credit card company. Use available cash after accumulating your savings to pay off your credit cards and other consumer debt.
Now that you have six months of saving and are debt-free, except for a mortgage and possibly an automobile loan, you are in an excellent position to look for investment opportunities. Small and diversified investments will provide the best protection against significant losses. It is essential to consider your risk appetite and risk profile when determining where to put your money.
Individual stocks, mutual funds, and exchange-traded funds are a good option for a small investor. Starting your own business, even as a side business to your primary income, is also an excellent way to create a secondary income stream that you can use for investment purposes. Many budget-minded investors find it challenging to divert funds from their primary source of income, like a job, so creating additional sources of income explicitly designated for the purpose of investing is helpful.
Remember that savings accounts are essential for protection against unforeseen financial challenges, but they will not help you build wealth. An investment strategy can use your cash reserves and discretionary funds to build a secure future.