Saving and investing are two methods of preserving and increasing money for future use. Interest is one way that the amount of money saved or invested can become larger over time. An increase in the value of the investments is another way for money to grow. The difference between investing and saving has to do with a number of factors. The most notable of these are the main goals for investing or saving the money, the safety of the money being held, what kind of return on the money a person might expect and the liquidity or accessibility of the money.
Whether a person chooses to invest or put money into savings depends on what his main goal is. The primary goal of savings is to preserve the original investment. This consideration takes precedence over everything else, including the amount of interest paid on the money being held. The primary goal of investing is to increase the amount of the original investment. Investments should not only keep pace with inflation but will hopefully outpace it, resulting in a net gain for the investor.
Money that is put into savings is generally held in the safest possible manner. There is very little risk of money held in savings being lost. In most cases, the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Share Insurance Fund insures money that has been placed in savings. This means that if the bank or credit union fails, the savings will be replaced by the insuring agency, up to a specified amount. An investment is not normally insured, and both the principal and any earnings are at risk.
Return on Investment
The interest rates paid by savings accounts are typically quite low, usually much lower than the expected return on money that has been invested. Even when a savings account returns a reasonable amount of interest, it typically doesn't keep up with the rate of inflation. This results in a loss of buying power for the money in savings, effectively creating a net loss even though the actual dollar amount has increased. When money is invested, it is anticipated that the money will increase significantly over time, faster than it could if simply placed into savings. This can result in a net gain for the investor. There is no guarantee that any investment will earn money, and potentially all money invested could be lost if the investments fail.
Money in savings, especially in a standard savings account, is typically more liquid than money that has been invested. This means that it can generally be accessed immediately, should the need arise, which may not be possible with money that has been invested. Investments are such things as the purchase government bonds or stocks, and it is necessary to sell these before the money can be accessed, which can create a significant delay in how quickly a person can recover the money that was initially invested.
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