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Investment

The Difference between Saving and Investing

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Hands of a young Asian businessman Man putting coins into piggy bank and holding money side by side to save expenses A savings plan that provides enough of his income for payments.When it comes to managing your money, saving and investing are two essential strategies that serve different purposes. Knowing when to save and when to invest is key to building financial security. Here’s what you need to know.

1. What is Saving?

Saving means putting aside money in a safe, easily accessible account for short-term goals or emergencies. The primary focus of saving is on preserving your capital rather than growing it.

Key Features:

  • Low risk: Savings are secure and protected.
  • Liquidity: You can access your money easily.
  • Low returns: Savings accounts typically have modest interest rates.

When to Save:

  • Emergency fund: It’s important to have 3-6 months of living expenses saved for unexpected events.
  • Short-term goals: Saving is best for goals like vacations or big purchases you plan to make within a few years.

2. What is Investing?

Investing involves putting money into assets like stocks, bonds, or real estate with the goal of growing it over time. Unlike saving, investing carries risk but also offers the potential for higher returns.

Key Features:

  • Higher potential returns: Investments typically offer greater growth over the long term.
  • Risk: Investments can lose value, especially in the short term.
  • Compounding: Gains and interest accumulate, increasing your investment value over time.

When to Invest:

  • Long-term goals: Investing is ideal for goals like retirement or wealth-building, which have a time horizon of five years or more.
  • Wealth growth: Investing helps your money grow and keeps pace with inflation.

3. How to Decide Between Saving and Investing

The decision to save or invest depends on several factors:

  • Time horizon: If you need the money in the next 1-3 years, saving is safer. For long-term goals, investing is usually better.
  • Risk tolerance: If you can’t afford to lose any money, stick to saving. If you’re comfortable with market fluctuations, investing can offer better growth.
  • Financial goals: Save for emergencies and short-term purchases, and invest for long-term milestones like retirement.

4. Combining Saving and Investing

A balanced financial approach often includes both saving and investing. Build an emergency fund with savings, and use investments to grow wealth for the future.

Both saving and investing are important for financial health, but they serve different purposes. Saving is about keeping your money safe and accessible for short-term needs, while investing is about growing your wealth over time. By understanding the difference, you can make smarter financial decisions and work toward both security and long-term growth.

The Many Types of Investment Risk

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Businessman using tape measure with risk wording for risk analysis investigate management and assessment concept.It is important for investors to understand that every investment has its own set of risks. One key to successful investing is to recognize the different types of risks that could be a threat to one’s financial well-being and to take steps to minimize their impact. What follows is an overview of the primary forms of investment risk as well as some tips on how to minimize that risk.

Market Risk

This is the risk that the prices of securities may fall due to external factors such as world events, economic changes, or investors’ expectations and outlook. Stock investors are more likely to be impacted by this form of risk than fixed-income investors.

Inflation Risk

Also known as purchasing power risk, this is the risk that is connected to the uncertainty over the future purchasing power of the income and principal of an investment. When prices rise (inflation), purchasing power typically falls. Historically, stocks have been less impacted by this type of risk since they have been able to appreciate in price at a faster rate than the rate of inflation. Typically, lower yielding cash equivalents are more likely to be affected by a rise in inflation.

Interest Rate Risk

When interest rates move up and down, bond prices change. When interest rates move up, newly issued bonds will generally pay a higher interest rate than similar, older bonds. What happens next is that the market of existing bonds falls because there is less demand for them. In other words, they lose market value. The opposite happens when interest rates fall: Older, previously issued bonds will pay higher rates of interest than newly issued bonds, making the older bonds more appealing to investors. The bottom line is that falling interest rates are generally beneficial to bond owners.

Maturity Risk

Since it is impossible to predict how the financial markets will perform in the future, long-term bonds are generally considered to be riskier investments than short-term bonds. This type of risk is known as maturity risk. Issuers of long-term bonds attempt to compensate for the additional risk by offering higher yields.

Credit Risk

Credit risk is the risk that a bond issuer will be unable to pay interest on the bonds it issued or repay principal when the bonds mature. Rating services, such as Moody’s Investor Services and Standard & Poor’s, carefully investigate the financial health of a bond issuer in order to alert investors to the risks of a particular issue. The rating services rate municipal bonds, corporate bonds, and international bonds. They do not rate Treasury bonds since the assumption is that they are solid, backed by the full faith and credit of the federal government. The rating services rate bond quality according to a system that employs letters and numbers, with AAA or aaa indicating the highest quality issues and CCC or ccc and below indicating poor quality issues that could default.

Credit ratings influence the interest rate an issuer must pay in order to sell its bonds. However, credit ratings are opinions about credit risk. Even though credit ratings are forward looking in that they assess the impact of foreseeable future events and can be useful to investors, they are not a guarantee that an investment will pay out or that an issuer will not default.

Currency Risk

Changes in currency exchange rates will have an impact on returns from overseas investments. For example, when the dollar rises in value in relation to the Euro, the return on a fund that holds a large number of stocks in European businesses is reduced when the Euros are converted to U.S. dollars. The opposite occurs when the dollar falls in value in relation to the Euro.

All investments have risks. Before buying a security, understand that the key to investing success is balancing risk. You can do this by having a well-diversified portfolio and an asset allocation strategy based on your risk tolerance and the number of years until you retire.

Diversification helps you manage risk by spreading your assets among a broad mix of different investments. When you do this, you are taking advantage of the fact that securities usually don’t move in the same direction at the same time. When some investments drop in value, others may rise or remain unchanged, offsetting to some degree those investments that lose value. Of course, diversification does not ensure a profit or protect against loss in a declining market.

Be sure to talk to your financial professional for insights on how you can balance risk in your investment portfolio.

Does Your Risk Tolerance Need a Realignment?

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Shot of a young couple meeting with a financial planner in a modern officeMarket volatility. A change in your time horizon. Different goals. All these things can affect the amount of risk you feel comfortable taking with your investments. Your ability to tolerate risk influences the investment choices you make and may have a significant impact on your success in achieving your financial objectives. Periodically revisiting your risk tolerance is an important step in the portfolio review process.

A Moving Target

Your feelings about risk may change depending on what the markets are doing. During a prolonged period of market volatility, you may find your comfort level dropping, even if you previously thought you had a high tolerance for risk. If you’re a conservative investor, an extended market upswing may have the opposite effect, encouraging you to take on additional investment risk. In either case, basing investment decisions on market behavior instead of a well-thought-out investing strategy isn’t the best plan. Instead, take time to reassess your feelings about risk. If they’ve truly changed, adjust your strategy going forward to reflect the changes.

More Than a Feeling

How much money could you afford to lose if investment values dropped significantly? Your ability to accept risk also depends on your financial circumstances and your time horizon for tapping your assets. If investment losses would leave your finances in jeopardy and you have a relatively short time frame before you’ll need your money, your capacity for taking risk may be limited. Make sure you consider your risk capacity in your review.

A Realistic View

A long period of either strong or weak market performance may convince you that the current trend will continue indefinitely. Perceived risk is how much risk you think an investment holds. However, your perception of an investment’s risk might not match its actual risk. In that case, you could be taking more or less risk than you should to remain within your comfort zone and still reach your goals.

Your financial professional can help you reassess your risk tolerance along with the level of risk in your portfolio.

The Money Market: The Basics You Need to Know

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Young finance market analyst in eyeglasses working at sunny office on laptop while sitting at wooden table.Businessman analyze document in his hands.Graphs and diagramm on notebook screen.BlurredInvestors should consider the advantages and potential risks before investing in money market mutual funds.

If you’re looking for a place to park money temporarily or if you’re simply trying to maintain a cash cushion, a money market mutual fund may be an investment to consider.1

Money market mutual funds typically invest in high-quality, short-term securities, such as U.S. Treasury securities, certificates of deposit, federal agency notes, and commercial paper. Tax-exempt money market funds invest in municipal securities issued by state and local governments. They generally pay dividends that are exempt from federal and/or state income taxes.

The ease with which you can buy and sell shares may make money market mutual funds an appropriate place for assets you’ll need in the short term. Funds frequently offer limited checkwriting privileges, making withdrawals simple.

Breaking the buck. Money market mutual funds are structured to maintain a stable net asset value (NAV) of $1 per share. A fund “breaks the buck” when its NAV falls below this amount. Breaking the buck is rare. But since money market mutual funds are not FDIC insured, investors will lose some of their original investment when this happens.

Understand the risks. Low risk doesn’t mean no risk. Potential risks for investors include interest-rate shifts, unanticipated redemptions, major credit downgrades for firms represented in the fund, and loss of purchasing power should returns fail to keep pace with inflation. Before you invest, review the fund’s holdings. Keep in mind that the fund offering the highest return generally presents the most risk.

A different investment. A money market account (MMA) is not the same as a money market mutual fund. MMAs are deposit accounts that pay interest at a rate that’s typically higher than the rate earned in a savings account. Money market accounts generally are FDIC insured, may require a minimum balance, and often limit transactions.

Ask your financial professional if money market mutual funds are a good option for your portfolio.

Source/Disclaimer:
1An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. You should consider the fund’s investment objectives, charges, expenses, and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.