What does your personal financial journey look like? You probably have some short-term goals, like paying off credit card or student loan debt, or building an emergency fund. Then there are probably some long-term goals, too, like saving for retirement or your kids’ education.
Each of these goals requires diligence and dedication, but they can also require a unique financial approach, too. That’s why it’s important to understand the difference between everyday saving and investing for the future.
At their core, the concepts of saving and investing are really quite similar. Both involve setting today’s money aside for a more secure and financially stable future.
For some people, that could mean saving money to buy a home or start a new business. For others, it might be building a well-funded retirement account that allows them to grow older without financial worries.
Both saving and investing can help you reach these goals, and each has an important place in your overall financial plan. However, if you dive below the surface, you’ll find that these two strategies also have some important differences.
Putting money into a short-term savings vehicle — such as a savings account, money market account, or certificate of deposit (CD) — can be a great way to build up emergency or other rainy day savings. These funds are an important part of any financial plan, and let you rest easy knowing that you’re prepared for any of life’s curveballs.
We typically use savings for short-term goals and spending because they offer:
Accessibility — The money is there for us when we need it and can also be accessed pretty easily.
Liquidity — If we have a big purchase coming up, we can typically pull from savings without much hassle or penalty. There’s no worry about any loss of value upon withdrawal.
Risk — Savings accounts are relatively low-risk, so we don’t have to worry about losing money while our savings grow.
Investing, however, is usually better-suited to goals that lie further in the future. That’s because invested funds:
Are less accessible — Money held in investments isn’t as readily accessible if we need it for a sudden, unexpected expense.
Provide lower liquidity — Depending on when money is pulled from an investment, it could mean receiving a lower cash value, paying fees or taxes on the withdrawal, or accepting certain penalties.
Often involve greater risk — The right mix of investments and risk can boost your chances of long-term financial growth. But that risk also means the potential for loss; with an investment, there’s always the chance of losing money.
Here’s a look at how investing can play such an important role in your overall financial wellness, and why the right investments can be the key to your success.
Investments offer a higher average rate of growth, especially when compared to your everyday savings vehicles. In fact, the greater the risk you’re willing to take on, the greater the potential for returns in the future.
The average S&P 500 return over the last 95 years is around 10-11% per year. When adjusted for inflation, this works out to about 7% annually. This kind of growth allows you to build your wealth higher and faster than you ever would just tucking it under the mattress — and even the best savings accounts don’t offer those kinds of returns.
Let’s say you make an initial deposit of $5,000 into an investment portfolio. You invest another $100 per month for the next 30 years, for a total out-of-pocket investment of $36,000. Over those three decades, a lower-risk portfolio might net you an average return of about 6% per year, for a total balance of around $130,500. If you’re willing to chance it, though, a higher-risk portfolio could net you an average return closer to 15% for a final account balance of around $1.3 million at the end of those 30 years.
The average rate of inflation is around 2-3% annually, though some years (like 2021) are much higher. If your long-term savings aren’t earning more than this rate of inflation, you’re technically losing money each year even if your account balance never goes down.
By investing your long-term funds, you can keep up with — or even exceed — the average rate of inflation. This ensures that your money never loses its purchasing power while you continue to save for the future.
You’ve probably heard the old expression, don’t put all of your eggs in one basket. When it comes to saving money, this is pretty sage advice. Since none of us knows what the future holds, diversifying (or varying) our savings can be a great way to protect wealth.
If all of your money is in the stock market, and the stock market crashes (as it did in 1929) or if you put all of your investments into real estate and that market turns (like it did in 2007), you could lose that hard earned savings.
Diversifying, though, allows you to not only build wealth, but also protect yourself from market downturns. It doesn’t matter if savings rates decline, markets drop, real estate bubbles burst… you have money elsewhere and are protected.
With the right investment portfolio, you can not only diversify your investments across various markets, but also choose the companies, industries, and causes that are most important to you.
Getting started with investing can sound pretty intimidating, especially if you’re brand new to the idea. But thankfully, you don’t need tens of thousands of dollars to make your first investment, and you don’t need some hot shot investment broker to manage your portfolio either.
These days, managed portfolios can make investing easier than ever, and allow you to choose, fund, and monitor your portfolio in just minutes online. To get started, you’ll need to provide personal information as well as choose your:
Initial investment (this can be any amount!)
Portfolio allocation (based on your risk tolerance and preferences)
Recurring investment amount
With MoneyLion’s Managed Investing platform, for example, you can get started with no minimum deposit required. This means that you can start investing and building your wealth no matter where you are in your savings journey.
You’ll then need to choose where that money gets invested; this might involve a questionnaire to determine your risk tolerance and how you can best meet your long-term savings goals. You can change this over time, too.
Next, you’ll pick your portfolio, which includes all of the assets you’ll be investing your money into. Portfolios can be categorized by risk, industry, special interests, and more.
So, if you’re passionate about social causes and companies working to better the world, you can choose a portfolio that invests in those types of companies. Or if you are most interested in the technology of the future, you can pick an innovative and tech-heavy portfolio.
Once you’ve picked a portfolio, determined your risk tolerance, and made an initial investment, you’re well on your way to building future wealth. Now, you’ll just need to continue investing in that portfolio as your budget allows.
It can be a totally hands-off process too, especially if you use a platform like MoneyLion which offers automatic investing. This way, you can set up recurring deposits so your portfolio grows without you even thinking about it. You can also use round-ups from any credit or debit card to further build your wealth… even if it’s a few cents at a time!
There are many different strategies and accounts involved in your financial wellness. Short-term savings can protect you today and help you plan for goals in the immediate future. Long-term savings can help you build wealth for the distant future, especially if you choose the right investments.
Investing can make it easier to exponentially grow your wealth and help protect yourself against market downturns, inflation, and other threats. Choosing the right investments, though, can be tricky — which is where a fully managed portfolio like MoneyLion’s can help.
With just a few clicks on their app, you can be well on your way to investing in the causes and industries that matter most to you. And you can do it with no management fees or minimum deposit requirement.
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