When it comes to financial health, having both a solid savings and investing plan is paramount to your growth. While they are related, savings does differ from investing. Here’s how:
Savings. This is the process of putting cash aside in safe, liquid securities or accounts. This can include FDIC insured checking accounts, savings accounts, short term CDs, or US Treasury Bills. The highest goal for these funds should be to preserve capital and prevent loss.
Investing. This is the process of using money to buy an asset that you think will generate an acceptable return over time, making you wealthier with each passing year. An investment can be anything from a small business, fine art, rare wine, gold, stocks, bonds, mutual funds, or real estate, just to name a few. Smart investments are the soundest way of strengthening your financial well-being, but can take time to build.
Saving should always come first, as it is the foundation of your financial health. Having adequate savings allows you to have capital to invest. There are 2 primary types of savings programs that you should include in your financial plan:
- Your savings should be sufficient to cover all of your personal expenses, including your mortgage, loan payments, insurance costs, utility bills, food, and clothing expenses for at least six months.
- Any specific purpose in your life that will require a large amount of cash in 5 years or less should be savings-driven, not investment-driven.
Only after having a great savings plan in place should you begin investing seriously. However, investing in your company’s 401(k) plan is a smart entrance into the investing world as you not only get a tax break, but if your company matches funds, then you essentially receive free cash just for investing.
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