Happy Femillionaire Fri-yay! Well… Not so Fri-yay as this post goes up late…. You know what my plans are for the week? Get. Shit. Done. Same as any other week. But I still love Fridays, mainly because it means new Finance tips on my Youtube Channel and here! Yay!
In this first post of 2019, and the first video in my Youtube playlist, Femillionaire, I want to start with a two basic definitions that can alter you from being comfortable, to being wealthy and financially independent.
Savings vs. Investing
I want to touch on the topics of savings and investing today and the key differences between the two.
Generally savings are in cash accounts held at your local or online bank.
Investments are investing in something with the intent to see your money grow.
Savings are held, investments are for growth.
Savings are cash in a savings account at your bank. You might keep savings in a checking account (which isn’t a great idea!). Savings can also be stored in Money Market Funds.
Investments are stocks, mutual funds, property, gold, or even in yourself. Anything that invest X gets you Y, where Y > X.
Saving money in a bank account has one soul purpose. It is short term money that you need in order to fulfill a want or necessity. There are a few things that need defined in that sentence.
First, short term. What is short term in terms of your money? Short term is anything less than five years. So, any savings should only be done for something that is 5 or less years away. This includes a house, a car, a new purse, a baby, etc. Short term also mean urgency, if an emergency happens, you need cash now.
Let’s break down the second part of that sentence, fulfill a want or necessity. Yes! Savings isn’t just for a rainy day fund (or to the more financially aware student, Emergency Fund), but is also for fun things like vacations, big projects, etc.
The final intent of savings is that it will be spent. You just may not know when.
Pay attention! This is where we go from cash rich to actually wealthy. The purpose of investments is to increase one’s wealth by converting one amount of money into a larger amount of money. The purpose of investments are that they take time, mature, and when they mature your money has doubled, tripled, or even quadrupled- something you certainly wouldn’t see in a savings account. Investments also aren’t actively spent until they’re used to help fund your retirement or your next big project.
Savings is going to have very little returns. I highly recommend parking any large amount of cash you do have (>$3,000 saved) into a High Yield Savings Account. These accounts will at least earn you 2% as of me writing this article. My current Synchrony account is at 2.2%.
Investments, historically, have a much higher rate of return than savings, primarily because they increase in value over time. While investments may decrease for a short amount of time, history proves investments increase wealth and net worth.
I know what you’re thinking. You’re thinking “gotcha bitch” TRY to tell me that savings is risky and a bad idea.
… Okay, I will. Savings is incredibly risky when it comes to your money. Are you going to suddenly have pennies, like you could with an investment? No. you’re just losing critical compounding time in the market when your money could be working for you. Also, you technically are losing money…. if inflation is greater than your savings account rate, which, it most likely is. So the $100 you have in savings today, is still going to be $100 in 10 years, but worth only about $80 of today’s dollars.
I think it’s quite obvious why investments are risky- it’s why many people, especially women, don’t invest to begin with. Investments could be $5,000 one day, and $0 the next. If you invest in a company and it goes Bankrupt, you’re out of luck. If you buy a house and it burns down before you can buy insurance, you’re out of luck.
What we need to realize that yes, stocks, real estate, etc are all risky. However, with due diligence and staying the course, especially when things are going south, Investments out perform cash. Every. Single. Time.
The availability of liquid assets, i.e. cash.
Savings are quite liquid. You’re able to pull out all the cash you need, generally on a single day, from a single bank. Liquidity is one of the key reasons for keeping cash.
Investments are not as liquid as savings, however different Investments have varying levels of liquidity. Stocks in a normal, health year of investment are pretty liquid. It easy to sell stock and have the money in your bank account less than a week to two weeks later. Real estate as an investment is a different breed. One can flip a house, or sit on it for month – even years – until someone wants to buy or rent it from you.
I hope the difference between savings and investments is clear to you now. In a way, investments, especially buying into mutual funds, are basically like saving with a slightly better interest rate. That is, until you have enough money where compound interest really takes root and you see your numbers start to soar.
After this article, I hope you are able to correctly discuss savings and investments and continue to invest and grow your wealth!
For the more audio readers, below is my Youtube video covering the same topics as above. Thanks!