- The difference between saving and investing
- Slow inflation and a sudden crash are similar risks
- Are you making the most of your existing saving and investing opportunities?
There is a difference between saving and investing and it’s important to know when it’s the right time to do each.
The primary goal of saving is a return of your money, often with an intended use within a relatively short period of time. The goal may be to have the down payment saved to purchase a house, a car, to create a rainy day fund for emergencies, or otherwise pay for something where having an amount of money available at a certain date is of paramount importance.
If, on the other hand, you have a longer range goal, such as to have sufficient money to retire in thirty years, you may wish to consider investing your money. Investing means putting your money to work (and at risk). But over a long period of time, without a need to use that money in the near future, investing has proved to be a valuable option.
Why? Inflation is one reason. For example, if you had the choice of receiving $1 today or $1 in one year and you expected the inflation rate to be 2% this year, you may decide to receive your $1 today and make your purchase today. You would do that because you expect that item to cost you $1.02 in one year. Another way of looking at this is that if you did not make the purchase today and held your money, your money would risk losing approximately 2% of its purchasing power due to inflation over that one year period.
The Long Term Risk of Inflation
Now let’s say your goal is to make a purchase in thirty years. If inflation were 2% each year for thirty years, your $1 of savings would be worth approximately 55 cents after the thirtieth year. That is, due to inflation the money you saved under your mattress would only have 55% of its purchasing power than thirty years earlier.
What’s the difference in purchasing power between a sudden stock market crash of 45% and a slow degradation of 2% per year over 30 years. Nothing, if you need that money now. Investing money based on your risk profile is one way to help avoid purchasing power degradation over the long term, while also participating (at some level of risk) in the growth of the economy over that same period.
Know Your Options
We encourage you to learn more about how to maximize the opportunities to save and invest that you may already have, but of which you may not be taking full advantage. A financial representative may be able to help you make the most of your opportunities and help suggest other ways you might not have considered to help you achieve your longer term goals.
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