Saving money regularly little by little is one way you can attain financial independence but investing is also another way to gain financial independence. So which is better, saving or investing?
Saving is putting money aside little by little. Savings usually take care of specific situations or emergencies. When you save, it means that your money goes into a saving account at a bank or a building society. We all know that cash stacked away at home will decline in value overtime. This is because inflation plays a crucial role in our spending power. The price you pay for goods now will not remain the same in the future, so the best thing to do is put your money some place where it can earn interest. Saving your money not only protect you from future costs but it also to some extent neutralizes the effect of inflation and devaluation of your cash.
For many people a savings account is often the most reliable way of ensuring they put away money for the unexpected expenses. But is this the only option? While this may satisfy your short- term goals, you definitely need to look elsewhere to build some financial long-term security.
When you invest, you are using some of your money to buy products that can increase the value of your money. This includes stock, shares in a fund, or shares in a property.
The Truth: Savings vs. Investing
It is fair to assume that persons, who have bank accounts, usually will have checking accounts they use regularly. However, there is a difference between a savings account and a checking account. With a savings account, you are unable to do regular transactions such as withdrawing cash from an ATM or paying a bill.
A savings account allows you to earn interest on your money, thereby protecting your money against the effects of price increases. Every saving account attracts an (APY) annual percentage yield and this is the interest rate that accumulates on the money you saved eventually.
This is normally about 1% yearly in the US, which means that your savings is growing steadily over time.
The financial experts will tell you that this is not ideally the best way to generate financial security.
The people on the outer edge of the investing world may assume that investing is just a sophisticated type of gambling; it’s a 50/50 chance of making a kill financially or losing everything. However, if you treat the stock market like a casino it will act like one. I guarantee you that the stock market will work for you if you approach it with a sound long-term plan.
The S&P 500 has an astounding 10% average return yearly. When measured against a 1% yearly return on savings account, the S&P 500 is definitely a better deal since it has a proven track record of being a more reliable form of investment. The S&P 500 has maintained its reliability during financial crises such as the Great Depression, Dot-Com Bubble and the 2008 Baking Crisis. If you had invested for a twenty period any time during these crises, your money would still be intact fully, not a cent less.
How Should I Save
Using investing as a way to save money will work only if you approach it as a long-term method. It’s foolish to invest your money and then withdraw it after a few months. Why? Because whatever gains you made will be swallowed up in charges and taxes.
The ideal thing to do is to use a varied approach. Whatever your short-term goals are, use a savings account to meet these needs. A savings account allows you to withdraw your money at short notice, yes, the interest is marginal but you are earning interest nonetheless and you have unlimited access to your money.
If you have secured a financial protection plan through a savings account you can begin investing in stocks for a better financial future. Understand though, that whatever money you invest in the stock market should remain there for at least five years. Do not invest money you will need in a couple of months.
The ETF is a good place to start investing if you cautious. This is a list of a number of companies, which, allow investors to revel in the average 10% return eventually.
If you want to make it good as an investor, you should look at companies that you think will be successful overtime. Study the companies that you or your colleagues interact with daily. Public companies such as Apple and Google with their smartphone and android systems, or Coco-Cola are successful companies. If you are buying their products, why not buy some shares into these companies and profit from their success as well?
It is so much easier to invest in companies you believe in, that way you can leave your investments there and watch them grow.
Financial independence is key to your future wellbeing, but it doesn’t have to mean keeping your money in a bank account that earns skimpy interest rates yearly.
Take the plunge! Check your financial health! Create a small emergency fund, then make the bold move and invest in your favorite companies and benefit from their successes and watch your savings grow.