Saving and Investing

Saving and Investing

Have you  ever thought about these terms … do you save  or invest? What’s the difference?  Do you use these terms interchangeably?

save and invest

I am  going to paraphrase from Investopedia  here;

Savings :  The amount of  money left over after your  expenditures are subtracted from your income.

Investing: The act of committing money  with the expectation of obtaining an additional income or profit:

When you stated this class many of you  had  or had in the past negative savings.  In other words  you spent more than you earned such as  incurring  credit card debt or taking out a school loan.  We spent  most of the first 10 weeks of this class on savings.   Once you  HAVE BEGUN creating savings then  you can think about investing.  (or reducing debt). 

Investing involves  risk and  therefore  you  probably don’t want to  “invest” all your money,  i.e. you will probably  have some money  that  you don’t care if it earns more,  you  just want to be sure it is there if and when you need it. 

jars labeled for different savings

  Examples:

1.     An emergency fund .  You want the money there if you need it.

2.     Vacation or Christmas present fund etc.

3.     A house or a child’s college (if within a few years)

It’s hard to invest effectively if  you  don’t know you goals.

If your goal  is to buy a house in the next few years  you will probably make different choices than if you goal is to create wealth to supplement your retirement in 30 years.  How soon you will need the money and the concept of withstanding a loss (risk vs return) drives your personal decisions.  There are slightly different   for everyone in this class. 

The funny part is that  not all good investment decisions are necessarily planned out,  the trick is that when  an opportunity  comes along you have to be willing to consider it.   Some of my better decisions  were just that….  opportunity.   I was able to take advantage of those however because I had had  my savings plan in place.. therefore when  opportunity came  I could take advantage.

Buying my first house:  I really had no   immediate plans to buy my first house.  I was living with a roommate in a nice apartment in Santa Monica after college and they announced they were going to raise the rent 10%.   The same weekend a college roommate  visited and told us that he had gotten the head basketball job  at a high school in Orange County.  He complained that he could not afford a  townhouse condo in  Orange County even though he had one where his prior job was. When we got talking I realized that  my “rent” in Orange  if I bought half a condo with him would be  less than my apartment rent  in Santa  Monica.  I had enough for my share of the down payment so  it was an easy decision. 

Our first rental property:  When my wife and I got married  we both owned Townhouses  near each other. We decided that rather than sell one right way we would try to rent one out.  Because we had owned them for a few years,  the rent was enough to cover the mortgage so by  holding on to it we could take advantage of the appreciation and future rent increases.  If we had sold it the money  probably would have been spent on something and been gone.

I just share these because  we didn’t overly plan ,  we just took advantage of opportunities.  We were able to do this because we had out saving under control  i.e. we had more income than expenses, so it  allowed us to make prudent choices on how we were going to invest for ourselves ( retirement)  and daughter  (college).  If we hadn’t first managed our savings  then we could never have made an investment plan work. 

I planned as well.

Our daughters education..  About the time our daughter was 3 we got serious about saving for her education. We decided on a monthly amount and never missed.   This gave us 15 years to save.   Because we had time we took some risk  with our investments.  However after about 12 years.. 3 years before she would  start college   we changed to a much more conservative approach so that the money we had saved would be there for  her. 

Retirement .  Both my wife and I saved  for retirement  beginning not long after we started out jobs ( and before we were married).    Savings started out small but  every time I got a raise I put some of that raise into my 401k plan.  Over time  I was saving a fair amount.  Again  I invested with more risk when younger and  changed as I got older  ( not as many work years left) .

To summarize… get your financial house in order …. More income then outgo and then make the plans that work for you.