It’s easy to confuse saving and investing. Although the goal of both activities is to grow your wealth, saving and investing are quite different. Many new investors don’t understand that saving money and investing money are entirely different things. They have different purposes, and play different roles, in your financial strategy and your balance sheet. Making sure you are clear on this fundamental concept before you begin your journey to building wealth and finding financial independence is vital because it can save you from a lot of heartache and stress.
Saving involves putting cash into a savings account and (hopefully) adding to it regularly. Your capital is not at risk and you have the chance to grow your money by earning interest. However, there is also the chance that the rate of interest paid on your money may not be higher than the rate of inflation so your money could be worth less in real terms.
Investing involves committing money for a longer period of time into an investment vehicle in the hope of making greater returns than those offered by cash. Unlike saving, investing involves an element of risk and there is no guarantee you will get all your initial capital back, let alone make a profit. But on the other hand, you could grow your wealth, depending on how your investments perform.
Unless you inherit a large amount of wealth, it is your savings that will provide you with the capital to feed your investments. If times get tough and you require cash, you’ll likely be selling out your investments at the worst possible time. That is not a recipe for getting rich.
There’s one golden rule that you should always keep in mind and observe when you’re investing: Never invest money that you can’t afford to lose. If you always remember the “never invest money that you can’t afford to lose” rule, and if you never violate it, you shouldn’t have to worry about eating cat food during your retirement or if something potentially catastrophic occurs like job loss or illness.
Worse than investing before you’ve established savings is the prospect of investing money you need to meet other responsibilities, which can be catastrophic. Any specific purpose in your life that will require a large amount of cash in five years or less should be savings-driven, not investment-driven.
Yet there’s a natural human tendency to want to overreach, to put in more money than you can afford and go for a huge payout. This trait tends to become magnified the more desperate someone is for money. He harbors the hope that hitting the jackpot will make all his problems go away.
Your first goal should always be to avoid major losses. Don’t get greedy. Be patient. Seek the advice of qualified, well-regarded advisors. Keep your costs low. This recipe may not seem very exciting, but it’s been proven to work for generations again and again.