Let’s get to some basics and talk a bit about whether you should save or invest your money. The two terms are used in a of different ways, often by people who don’t fully understand them. Savings can be investing. Investing can happen without saving. And saving can happen without investing. You need to invest for the long-term and save for the short-term.
Invest means leveraging capital in an attempt to generate revenue. This can be done in a lot of ways from buying equity in a startup, giving a loan with interest due, buying bonds, CDs, or stock funds, and even putting money in an interest bearing savings account. And of course, let’s not forget “sweat equity” from investing your time (time, of course, being the greatest capital of all).
Saving means extracting value from an existing cash flow. You earn a paycheck and can take some of the money from that paycheck the apply it to a piggy bank, a savings/checking/money market account, even stashing it under a mattress. You’ve taken part of your existing funds and put it away. It can also mean finding ways to reduce expenses or increase the yield from your existing cash flow.
What does this mean for you –
Your savings can be an investment if you expect to make a return, such as when putting money into an interest bearing savings account instead of your regular checking. It’s important to understand your goals and the level of risk you are willing to accept for your money before deciding to simply save or invest. Everyone should know the phrase “don’t gamble with money you’re not prepared to lose” (and even more poignantly, “don’t gamble rent”).
Saving is safe. You may lose money long-term based on inflation, faster if you are not putting the money into a high-yield savings account or CD. The money you invest should be money you don’t need in the short term and can set aside for years.
For example, when investing in a startup company (whether as an Accredited Investor or through Equity Crowd Funding) you will have to wait for a liquidity event (sale or IPO) before seeing capital back and risk that there may never be a liquidity event. And when buying stocks, index funds, or ETFs market fluctuations may cause a significant drop in the value of your investments.
I personally save money in a high-yield savings account on a monthly basis toward future car purchases, but I also invest in a 401k to reduce my annual tax burden and maximize my investment value. Always make sure you understand the implications of where you put your money. Know your goals and ensure your money will get you closer to financial independence.
There is a chart on this post by ShawnRoe.com that does a great job defining the risk, advantage, and importance of long-term investing.
If you click the link above for Equity Crowd Funding and then file to fund your company through a crowd funding campaign, then I will get credit from Wefunder to invest in companies. If you do file a crowdfunding campaign, let me know and I might invest my new found $1000 in you! (Hopefully I can find an actual affiliate link that will pay me enough to cover taxes on that $1k.)