Senin, 10 Oktober 2016

Finding the Right Balance Between Saving and Investing Money

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Finding the Right Balance Between Saving and Investing Money. Many new investors don't understanding that saving money and investing money are entirely different things. They have different purposes, and play different roles, in your financial strategy and your balance sheet.

Saving and investing are two unique concepts, and it's important to understand the difference between them and the need for each.

Make sure you are clear on this before you begin your journey to building wealth and finding financial independence is vital because it can save you from a lot of heartache and stress.

I've witnessed firsthand, and spoken with many individuals, who lost everything despite having wonderful portfolios because they didn't appreciate the role of cash in their portfolio. Cash deserves respect. It's goal is not always to generate a return for you.

Perhaps the best place to start would be spell out the differences between saving and investing for you, defining both concepts.

Saving  by definition: involves the protection and preservation of money from loss .

Saving money is the process of putting cold, hard cash aside and parking it in extremely safe, and liquid (meaning they can be sold or accessed in a very short amount of time, at most a few days) securities of accounts. This can include checking accounts and savings accounts secured by the FDIC. This can include United States Treasury bills. This can include money market accounts ( but not always money market funds as you need to look at the holdings and structure closely).

Above all, cash reserves must be there when you reach for them; available to grab, take hold of, and deploy immediately with minimal delay no matter what is happening around you. Many famous wealthy investors, as well as older investors who lived through the Great Depression, actually advocate keeping a lot of cash hidden on hand somewhere that only you know about even if it involves a major loss.

It wasn't widely reported at the time but during the 2008-2009 meltdown, some hedge fund managers were reportedly sending their spouses to get as much cash as they could out of ATMs because they believed the entire economy was going to collapse and there wouldn't be any access to greenbacks for awhile.

Only after capital preservation is accounted for do you worry about secondary considerations for money you have parked in savings. Namely, keeping pace with inflation.

Investing money is the process of using your money, or capital, to buy an asset that you think has a good probability of generating a safe and acceptable rate of return over time, making you wealthier even if it means suffering volatility.

Investing, on the other hand, means to make a long-term commitment of putting money away and letting it grow. This involves risk , such as the occasional and inevitable downturns in the market; however, over the long-term (five years or more) those dips are expected to smooth out into an overall upward growth pattern.

True investments are backed by some sort of margin of safety, often in the form of assets or owner earnings. As you learned in How To Start Investing, the best investments tend to be so-called productive assets such as stocks, bonds, and real estate.

Compare some of the differences between saving and investing.


Short-term: Ready to go
Saving is typically for smaller, shorter-term goals in the near future (usually three years or less) like going on vacation or having money for an emergency.

Ready access to cash
A savings account gives you access to ready cash when you need it. But many savings accounts do limit how often you can take your money out. Ask at your bank.

Minimal risk
If your money is in an FDIC-insured savings account, it’s at minimal or no risk, because your funds are insured by the Federal Deposit Insurance Corporation (FDIC). That means that if anything ever happened to the bank, the FDIC insures each person’s money to at least $250,000.

Earn interest
You can earn interest by putting money in a savings account, but savings accounts generally earn a lower return than investments.


Long-term: Achieve major goals
Investing can help you reach bigger long-term goals (at least four to five years away), like saving for a child’s college education.

Harder to access cash
When you invest your money, it’s typically not as easy to get your hands on it quickly as compared to a savings account.

Always involves risk
You may lose some or all of the money you invest.

Potential for profit
Investments have the potential for higher return than a regular savings account. Your investments may appreciate (go up in value) over time. This increases your net worth, which is the value of your assets (what you own) minus your liabilities (what you owe). If you sell for higher price than you invested initially, you make a profit.

Note: Remember: the greater the risk of an investment, the higher potential return or loss of your money.


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