For many young people, the concepts of saving and investing blend together – after all, both are about accumulating more financial resources, right?
The terms can be used interchangeably in some cases, but they also have stark differences:
Saving
Saving is about safety and optionality over a short-term period (0-5 years). Cold hard cash can be saved to buy an important item, or to get through emergency situations.
Investing
Investing is about setting yourself up for long-term financial success. It’s the process of putting money to work over a long period, such as 10-60 years, by buying and holding assets that will grow from compound interest.
INVESTING IS ABOUT RISK
In the investing world, the returns you get are linked to the perceived level of risk.
For example, holding onto cash is extremely low risk – and as a result, it has a low rate of return. Maybe you can earn 1% or 2% in a savings account, or using other short term cash like instruments.
Meanwhile, if you buy stocks, they come with a certain level of risk. It’s possible the company you invest in may run into problems, or even go bankrupt – but for taking this extra risk, the market is willing to compensate you by paying a higher rate of return.
Investing is about taking advantage of higher rates of return and benefiting from the power of compound interest over long periods of time. It’s also about finding the best ways to mitigate the risk (diversification, being patient, etc.)
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