Do you understand the difference between investing and saving? This is what you need to know when it comes to growing your money.
Both investing and saving your money can be beneficial for building up your finances, but how do these two methods differ? Is one option better than the other? Here is everything you need to know when it comes to investing for beginners.
Saving means that you are setting money aside for future goals such as a down payment for a house or a car. However, this can also provide a much-needed cushion in case there is an emergency, so you can deal with the unexpected. This is an important behaviour to maintain because it requires you to pay closer attention to your expenses, so you can keep track of your spending habits. A great way to save money is to open a tax-free savings account.
Now that you are excelling at the habit of saving, what do you plan to do with the money that has been set aside? Do you keep it stored away in the same savings account, or do you consider investing your money?
Are you looking to grow your money? Well, the best savings accounts only earn approximately 2% interest. That doesn’t do very much for you or your money. However, the stock market typically earns about 5% over savings accounts per year. Therefore, investing some of your income is the key to growing your money.
Unlike saving, which is beneficial when you want to buy a new car or go on a vacation, investing is a long-term game. It’s a gift for your future self.
What is investing?
It is the process of purchasing an investment product with the money you saved (or that you continue to save regularly). Investing is the idea that your money will work to earn even more money over time rather than having it sit in a savings account. In many cases, the growth that comes from investing your money helps to make your financial goals achievable.
Passive vs. Active Investing
Many people are under the impression that investing is about picking stocks that are going to be the next “big thing”. This is called active investing. However, stock picking is not best for the inexperienced. Actually, it’s been proven that having experience does not guarantee success either.
If you don’t believe us, the Princeton University Professor of Economics Burton Malkiel claimed that a blindfolded monkey that throws darts at a list of stock symbols could rival experts. In 1973, when this was put to the test, the monkey actually did better than the experts.
Research proves that passive investing, which means investing in large chunks of the stock market and holding them, can beat active traders 84% of the time. Therefore, it is best to invest in the long-term game.
Real Estate Investments
There are a number of ways to approach real estate investments. This topic is too intricate to discuss in more depth in this article. However, if you have an interest in real estate investments, there are various opportunities to keep in mind. These are the most popular options:
- House Flipping: Buying a fixer-upper with the intention of renovating it quickly and re-selling.
- Primary Residence: Purchasing a house with a long-term investment in mind and growing your net worth.
- Rental Properties: To bring in some extra income.
- Vacation Properties: To rent them out.
- REITs: You can purchase shares of publicly-traded REITs.
- Rent a Room: With rental websites like Airbnb, you can rent out your place.
So, Should You Save or Invest Your Money?
Ideally, the answer is both because you should have a mix of savings and investments. Savings are important when there is a need for an emergency fund to cover the costs of unemployment or unexpected bills. However, investments work towards building your money to fund your future retirement plans. At the end of the day, you have to do what is best for you and your finances. Therefore, figure out what your next steps should be and go from there.
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