Getting Started With Investing

After wrapping up our tax series last week we’re kicking off April with an Intro to Investing series with a comparison of “saving” and “investing.” These two terms get used interchangeably sometimes, and it’s important to know the difference.

Both saving and investing are important because they set aside money now for use in the future. How far in the future, what the money is for, where you keep the money, and how much you can expect it to grow (or shrink) are where the differences come in.

Saving is better for short term goals like an emergency fund or upcoming vacation. You need access to the money soon, you’re not really concerned about the money growing over time, and keeping it stashed in a savings or checking account is appropriate. Savings prioritizes quick access to your money and making sure it doesn’t lose any value.

Investing on the other hand is better for long term goals; like retirement or college for your kids. You don’t need access to the money soon so your priorities are different. You want your money to grow so a 1% return in a savings account isn’t going to cut it. Investing means putting your money into something with the potential to gain value over time; stocks, bonds, mutual funds, etc. With that potential for growth comes risk – the potential for it to lose value for some of the period as well. Investing can be done in a 401(k) or IRA for retirement, a 529 plan for college, or a regular brokerage account. Each has its own advantages and disadvantages and where you invest can matter almost as much as what you invest in come tax time.

There’s no clear line where saving stops and investing begins. It’s a continuum of options that balance the trade-offs described above. The important thing is to match up your goals for the money with where you keep it and what you put it in (i.e. keep it in cash, put it in a CD for a few months, or invest it long term in a 25 year target date fund). Questions about how investing works? Let us know at ask@brightdime.com or log in and chat with a coach.