Most people do not realize there is a huge difference between saving and investing. You potently save for security reasons. If you are ever in a jam, your saving is used to bail you out. As far as investing you generally invest to gain wealth or free up some of your time. Time is your most valuable asset. Think of it this way; do you want to pay a bill (saving), or would you like to work at never paying bills ever again (investing)? In today’s blog, I will try my best to show you the pros and cons of both saving and investing. This way you can choose which best fits the lifestyle you want.
Let us say you wanted to go the saving route which is good. You would then pick an amount that you would live comfortably on. Then day by day, week by week, month by month, and even year by year, you would start putting money to the side to reach that goal. Some people only need a few hundred others a few thousand. Then you have the one that requires a few millions or billions. You have people that will feel that billions are excessive but again it goes with the lifestyle you will see for yourself. The best part of saving your money traditionally will be the fact that this money is 100% liquid. Which means if you need any of it you can access it immediately. Another great thing about savings you can give people tax-free money if you want to help them (depending on how you transfer the money to them.) The main reason why people prefer to save is they will always know the amount they put away. If you saved $10,000 or maybe even $100,000 you know that is the amount you have. That amount will be there if you need it tomorrow or ten years from now It could be the best security blanket knowing that it is there. I feel because of the event in 2020 everyone should at least have a couple or few thousand dollars saved for that reason only.
Everything I said in the saving pro stands the same. There is a downside to saving might not be the worst thing but it is worth mentioning. With saving there is always an unexpected bill that happens. So, you will always have to dip into your saving this will keep pushing your goal date further back. For example, you wanted to save a years’ worth of your salary (this is extremely easy to do I will explain it in another blog) you might be up to eighty percent. Then you lose your job and you out of work for over a year. After the unemployment is used up, you will now start living off your savings. Yes, I know what you are about to say, “that is the reason why you saved it in the first place.” Now you are starting a new job maybe with a pay cut and now you are back to zero. All the time you spend cutting back, not going out, not being able to purchase the things you wanted, like a family vacation or a new car must again be put on hold until you rebuild. Another problem with saving money is inflation. For those who do not what inflation is. The textbook definition is a general increase in prices and fall in the purchasing value of money. This means if you have that same $10,000- $100,000 that we spoke about in the saving pro for ten years will buy you fewer things than it could buy you today. 30 to 40 years ago a house would have run you about $15,000 to $200,000. That same exact house today might cost you $150,000 to $600,000. Your $10,000 to $100,000 would still be sitting there ready if you need it but now you would have to add a bunch of money to buy what you wanted.
With the power of investing your money, it can grow in a matter of months, weeks, days even minutes. Depending on where you choose to invest it. Your investment can 2x, 10x, 100x, or in some cases 1000x your initial investment. The three reasons for this is interest, capital gains, and compound interest. Interest is when your money is loaned out and someone else uses it, they will pay interest (a small fee). This is like when you leave your money in a bank account. The same as if you invest in the stock market when you buy a stock you are lending the company money so they can grow the company in size or profit. That brings us to capital gains, this when you buy a stock, bond or real estate let say you paid $1000 for it today and the value goes up to $1050. tomorrow that means you gained $50.00 on your investment. You can then take the $50.00 Profit or leave it with your investment to grow some more. When you leave the money in the pot to grow over time that is called compound interest. You will now receive interest on your $1000 and receive interest on the $50.00. Every year this will keep adding the interest on top of the new interest and growth of your investment. Before you know it, the compound interest will surpass your initial $1000. Without you even putting any other money into that investment. The key is to keep adding to the funds and never remove any profit until it is to the point where you can live off the interest alone. This usually takes about 30 years but if you start in your 20s’ by your 50s’ you might never have to worry about money ever again. Just remember NEVER touch the principle.
You heard about the beauty of investment now let us look at the downside. This is investing and it is not as safe as the savings methods we spoke about earlier. With investing you can make tons of money over time or very quickly, but you can lose everything just as fast. Same $1000 invested you can wake up tomorrow and it could lose $50.00 of value in a day. Leaving you with $950.00 or even worst a stock market crash and you will only have $200.00 left what would you do? The beginning investors or day traders will panic and pull their money out fast incurring massive losses. With investing you need to know the fundamental of any company before buying a share. You need to know what are the future plans of the company for the next few years, find out how much cash flow they have on hand. What is the debt to assets ratio and if the company is over or undervalued? With real estate, you need to do your homework on the neighborhood the town's local rules and regulations. The zoning permits as well as the tax laws. Not to mention the current value of the area and what are the local developer are planning that might affect the value of your investment. With investments, you can be a millionaire on Monday and filing for bankruptcy on Wednesday. So, if you choose to invest which I still strongly recommend finding someone that works in the field to help if you do not understand how to research these things for yourself. Never throw money in the wind hoping that it will make you more money that is not how it works. The best and smartest investors in the world like Warren Buffet, John Jack Bogle, Bill Gross, and Peter Lynch loss millions even though they ended up making billions. So, before you say you know everything about investing and end up losing your life’s savings make sure you invest wisely and have a backup plan.
Today's Call Of Action Let Us Know Are You A Saver Or Investor? Tell Us If You Plan To Switch Over Because Of The Information In The Blog.