A clear understanding of the meaning and relationship of saving and investing is necessary for good financial management. These two (2) terms have become so common to the human ear and have been taken for granted by so many people. However, these two (2) being the basics of concepts in financial management, have great implications to one’s economic well-being since, like any type of resource; one’s reservoir of funds can be become depleted any time if not handled wisely. So “What is saving and investing?” and “What are you currently doing with your finances?” are good questions to ask at this point.
What is Saving?
Saving can be defined as setting aside a portion of one’s income for something – a goal, to be more precise. There are different types of goals, among which are the short term, medium term, and long term goals. Short term goals are things that a person wants to achieve within the next five (5) years. Medium term goals are those that an individual seeks to attain in 5 – 10 years’ time. And long term goals are things that a person hopes to reach ten (10) years or more from now.
A clear knowledge of one’s goal/s for saving is important in order for the person to know how he/she should save. For short and medium term goals, savings are usually done in the form of cash deposits. However, when saving for medium term goals using cash deposits, one should be mindful of inflation rates that rise and fall from time to time, which affects the rates of money. However, for long term goals, wherein one does not need cash immediately the stock market might be a good option to put one’s savings into.
What is Investing?
Investing is taking a portion of one’s financial resources with the aim of making it grow. This can be done by buying things that have the potential of increasing in value over time. Examples of these are stocks, bonds, real estate properties, and shares, among others. This is also includes businesses that usually generate profit regularly from their sales activities. Investing may also be done in the form of insurances – life, health, death, etc. that benefit not only the investors but their dependents as well.
A detailed view of one’s life goals is important in order to determine whether it is already advisable for a person to invest or not. Prior to investing, one should have set aside a readily available amount of money equivalent to three (3) month’s worth of expenses for his/her basic needs. These include food, clothing, shelter, and some extra cash enough to meet unforeseen needs such as those required in emergency situations. Prior to investing, it is important that a comprehensive accounting of one’s financial records is done, wherein existing debts should be settled.
Who should save and invest?
Everybody should save and invest! Both are essential ingredients for sound financial management. A systematic way of executing this is by first creating a comprehensive list of one’s goals, identifying them per category – short, medium, and long term goals. The result will be detailed checklist that will help and guide the individual in budgeting his/her finances as he/she allocates them among the items that he/she has identified as savings and investments.
Majority of an individual’s income might be set aside for savings purposes if he/she has more short to medium term goals. On the other hand, should long term goals outweigh those that are of a shorter range in nature, one bulk of one’s finances might end up being used for investments. When into savings, it is advisable for the individual to spread his/her funds in different bank accounts both for security and accessibility purposes. Banks chosen should be stable and reliable, preferably those that have been in the industry for quite some time.
Aside from life goals, an individual should take into account his/her interest when investing into something to ensure that motivation is sustained. It is also important to educate oneself in the type of investment he/she intends to venture into, studying the money market and regularly analyzing financial trends to maximize one’s investment activities. Never hesitate to seek advice and/or assistance from professionals or experts in the field. And for someone who has intentions of venturing into other forms of investment in the future, it might be wise to first take things slow by entertaining each investment one at a time.
It is very important to know when to save and invest. And one can determine this based on the clarity of his/her goals. For short range goals, save. For long term goals, invest. So which is better, to save or invest? Well, it’s up to you.
1st image by Stuart Miles / freedigiphotos.net
2nd image by screationzs/ freedigiphotos.net
3rd image by David Castillo Dominici/ freedigiphotos.net