Importance of striking the right balance between savings & investment

Before one starts the process of building wealth and discovering financial independence, it is important to understand some of the basics. A key aspect of saving and investing is that the two factors are related but independent processes that one should not confuse. A disciplined investor should appreciate the balancing act between saving and investing, the two foundations of success.

The best place to start is by trying to understand the difference between saving and investing.

Saving comprises putting cold, hard cash aside and placing it in extremely safe and liquid securities (refers to securities that can be encashed very fast) or accounts. This can include FDIC insured checking accounts, savings accounts, short-term certificates of deposit, or United States Treasury Bills. It can even include FDIC insured money market accounts (but not money market funds, which are not insured). The primary goal of these funds should be of preservation capital. Keeping pace with inflation, if possible, should be the secondary goal.

Investing is the process of deploying money (referred to as capital), to purchase an asset that one expects would generate safe and acceptable returns over time and would make one wealthier as time passes. An investment can include a small business, a fine piece of art, gold coins, stocks, mutual funds, bonds, real estate, or antiques. It can also include song rights, patents, trademarks, or intellectual property. Although all these can be categorised as investments, generally, we refer to stock markets and debt markets securities when we talk about investment. Good investments are the soundest way of growing wealth, but they can take time, sometimes years, to deliver results in an uncertain world.

 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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