Sunday, May 23, 2010

What is the Difference Between Saving and Investing Money?

It is important to understand the similarities and differences between saving and investing your money. It is also important to be sure that you are doing both within your budget and wealth building plan. Basically saving money is putting money aside on a regular basis. You spend less money than you earn and put the rest into the bank. You should have this be an automatic part of your monthly budget.
Investing is taking this a step further. Once you have a good amount saved, you can begin investing money. Investing is the way that you will begin to really grow your money and begin to build wealth. If you keep your savings in a savings account, the amount of interest you will earn will be very small. However if you invest in mutual funds or stocks, your interest rate will be much higher. You will eventually come to the point where your investments make more than you are contributing each month. Your wealth really begins to grow at that point.
When you begin to build wealth, it is important to spread your risk. You should have money in your emergency fund, that is not invested. It needs to be easily available without taking a big penalty for accessing it. A money market account at your bank is a safe place to put this. Mutual funds are an easy way to spread your risk as well. These funds are spread out over many different stocks, so that if one company fails, you do not lose everything. Additionally you should have your money invested in more than one mutual fund. You don?t need to have twenty mutual funds, but three or four is a good start.
Additionally you may consider investing in other things. One example is real estate. This can bring you a good passive source of income. Real estate also tends to rise in value over time. However, do not do this until you are ready to purchase in cash, and can cashflow any repairs or other expenses involved with the real estate.
This plan is fairly straightforward, but it will not begin to work, until you spend less than you earn and you focus on getting out of debt. Your net worth is determined by subtracting your debt from your assets, if you accumulate debt as fast as you save and invest, then you are not going to come out ahead. Begin budgeting, and then you can begin saving and investing effectively.

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