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Article #333: Saving Versus Investing

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In simple economies, there is little Is storing money safely, such as in a
distinction between savings and bank or money market account, for
investments. short-term needs such as upcoming
One saves by reducing present expenses or emergencies.
consumption, while he invests in the hope Typically, you earn a low, fixed rate of
of increasing future consumption. return and can withdraw your money
Therefore, a fisherman who spares a fish easily.
for the next catch reduces his present Investing:
consumption in the hope of increasing it Is taking a risk with a portion of your
in the future. savings such as by buying stocks or
Most of the people probably have savings bonds, in hopes of realizing higher
accounts with ATMs to access their long-term returns.
hard-earned cash and be able to store Unlike bank savings, stocks and bonds
away any extra cash in a place a little over the long term have returned enough
safer than a mattress. A few of you may to outpace inflation, but they also
even have some stocks or bonds. decline in value from time to time.
Let me explain why while a savings The rate of returns and risk for savings
account in the bank may seem like a safer are often lower than for other forms of
place than the mattress to store your investment.
money, in the long-term it is a losing Return is the income from an investment.
proposition! Risk is the uncertainty that you will
If you open a savings account at the receive an expected return and
bank, they will pay you interest on your preservation of capital.
savings. So you think that your savings Savings are also usually more liquid.
are guaranteed to grow and that makes you That is, you may quickly and easily
feel extremely good! convert your investment to cash.
But wait until you see what inflation The decision about which investment to
will do to your investment in the choose is influenced by factors such as
long-term! yield, risk, and liquidity.
The bank may pay you 5 percent interest a Investments may produce current income
year on your money, if inflation is at 4 while you own the investment through the
percent though, your investment is only payment of interest, dividends or rent
growing at a mere 1 percent annually. payments.
Saving and investing are often used When you sell an investment for more than
interchangeably, but they are quite its purchase price, the profit is known
different! as a capital gain, also called growth or
Saving: capital appreciation.






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