What is the Difference Between Saving and Investing?

A key concept to understand as you work to secure your financial future is the difference between saving and investing.

When I work with clients, I am always a fiduciary. I’m an advocate for my clients’ best interests at all times. So, we often talk about savings AND investing priorities. I help clients clarify savings needs and investing needs.

The KEY DIFFERENCE between saving and investing is timeframe.

What is Savings?

• Money you know you will need on a date certain within 24 months.
• Money you MIGHT need in the event of an emergency.
  • Major home equipment failure, like furnace, roof, refrigerator.
  • Disruption of income from job change or illness.
  • Car wreck.
  • Medical emergency.
• Money that should be very safe. No chance that the principal amount deposited would reduce in value.
• Money that should be very liquid. Easy to get at on very short notice, within minutes or hours.
• We are willing to receive an interest rate near the inflation rate in exchange for safety of principal and liquidity.
• Usually sits in a bank savings account.

What is Investing?

• Money you do NOT plan to spend for three years or more.
• Money you NEED to see grow faster than inflation.
• We are willing to accept temporary fluctuation in value of the investment in exchange for faster growth over time.
• Could be sold on any day. Could have cash within 5 business days. On short notice, might not receive the full principal amount.
• Usually held in a brokerage account.

Every family SHOULD have both savings and investment.

How much should I save?

• You should have three to 6 months of essential bills sitting in an emergency bank savings account.
• If your work is more volatile and it might take longer to find the next job, you should have 12 months of essential bills in savings.
• You should also be SAVING 20% of your gross pay for retirement. Send this money to your company sponsored retirement account or to a self-directed IRA for you and for your spouse.
  • 2021 IRA limits:
    • All tax workers = $6,000 each per calendar year.
    • Those better than age 50 = $7,000 each per calendar year.
  • 2021 Employer Sponsored Plan limits:
    • All tax workers = $19,500 saved from your pay each per calendar year.
    • Those better than age 50 = $26,000 saved from your pay each per calendar year.
    • Some employers match your savings with additional money. (Ask your HR manager for details.)
    • Some employers add a profit-sharing contribution to your account. (Ask your HR manager for details.)

How much should I invest?

• Like I often say, this depends on your goals.
• Invest all your retirement savings (20% of your gross earnings) into stocks of great American companies. A low-cost S&P 500 fund is a great start. You will not need this money for many years. You want to get all the growth the market will provide. (Historical return of the S&P 500 for last 100 years with dividends reinvested is 10.87% per year.)
• If you have other long-term goals (three years or more) that money should be invested.
  • Savings for college expenses in 10 years.
  • Saving for a winter home in the sun during retirement in 15 years.
  • Savings for the world cruise on your 50^th anniversary in 20 years.

If you are like most families, you have some questions and would benefit from some guidance as you set savings and investment goals. That’s a what a CERTIFIED FINANCIAL PLANNER™ professional is for. With great training, years of experience and a commitment to the clients’ best interests, a CFP® professional can be a huge help.

If you would like to talk with me about your savings and investment goals, I would be honored to be of service. Follow this LINK to find a time for us to talk.

To find a CFP® professional near you, start your search here.

As you visit with financial planners, I suggest a couple things to check:

• Is the advisor always the client’s advocate – a fiduciary advisor?
• Is the advisor paid by clients, not financial product manufacturer or distribution network? That would be a fee-first advisor.

These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.

A fiduciary, fee-first, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.

Yes, I am a CFP® professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.

If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.