Saving vs Investing: What’s Better Now, What’s Better Later
I was talking with a new client and they said they were saving for retirement. I replied with “Are you investing for retirement?” They asked me what the difference was.
Savings is just that, setting small amounts of money aside for a rainy day or a short-term goal, and there is value in that. With this approach, you’re concerned about having the money available to spend in the next year or two. And in a lot of ways, this makes the most sense since conventional wisdom tells us not to assign risk to funds you plan to use in a year or two.
Who needs savings?
Everyone. We should all have money put aside that would cover three to six months of expenses in case of an emergency. Your options for growing and holding this amount of savings can be a CD, money market account, an online high-yield savings account—whatever you’re comfortable with that leaves your money safe, accessible, and protected from the risk of the market.
With so much competition in retail banking, it’s easy to get caught up in looking for the best rates online and at brick and mortar banks. That “safe money” mindset is helpful when it comes to getting the best interest rate but can hold you back when it comes to investing. Too safe a mindset can leave your money stagnant in an old CD instead of out working for you in the market.
For goals that land in that in-between place of two years to five years from now, you need a combination of saving and investing to protect you from volatility.
Who needs investing?
Everyone. Investing is looking toward a future point that is five or more years down the road. Investing is realizing that the cost of goods increases over time. Investing is understanding that the average savings account earns around 1% in interest while the average inflation rate is around 2.25%. Look no further than real estate prices to see how things change: In 1985, the average new home was around $50,000 while today’s national average is around $325,000—locally the average is $200,000.
The cost of things in the future will be more than we pay for them today. Merely saving for that adjustment and relying on safe money rates to cover the difference will only lead to disappointment.
The investing mindset focuses on risk versus return and understanding that diversification is key. Some of us like risk and some do not, we all have our own tolerance. To invest you need to understand the inherent market risk—but your time spent in the market makes the biggest difference. By taking the time to talk about risk tolerance, we ensure that your investments are within the level of risk you’re comfortable with.
There’s a balance
Taking on too little risk is as bad as too much risk—that’s the safe money mindset. To me, investing is taking on risk so that you have the opportunity for the return that comes along with it. We have experienced many market events over our careers and have seen people gain based on the risk they are willing to take.
