When you look at your opportunities in investing your money compared to your opportunities from saving your money, you might wonder: Is this a difference in quality, or kind? Is your money going to be more valuable in the future, or less?
And how do you act on these evaluations?
The Qualities of Investing and Saving
You have probably heard that when a person wins the lottery, they are given two ways of claiming their prize money: Either by taking it all in one big, heavily taxed, cartoonishly-oversized check, or in smaller installments overtime that ultimately amount to more money.
It seems obvious that the smaller installments overtime would be the more economical option. It amounts to more money, doesn’t it? Only a short-sighted fool would take the smaller sum.
Thinking about this is very similar to thinking about investing versus saving. Even a static amount of money has forces acting upon it.
Imagine you have a healthy sum of money in your bank account. After a year, your bank provides you with a 1% allowance of the money you have. So, a bank account with $100,000 in it would yield $1000 in interest.
However, the economy grows by more than that percentage every year. In fact, inflation goes up by more than that every year. Inflation usually results in every dollar losing 3% of its value. So while you may be given 1% in interest, you lose 2% of the value of that inanimate $100,000.
But if you invest that money and grow it by 4%, then in that case you have affected a growth of 1%. Granted, this is not a large increase. But it at least offsets the natural entropy of money’s value in the face of inevitable inflation.
Investing comes with risks that saving does not, however. Investing can make you lose money if you make a bad investment.
When To Do Either
For this reason, if you are currently managing your debts and not seeking to buy a house, car, or start a business, then you should save rather than invest.
The reason is because of the aforementioned risk involved in investment. You don’t want your ability to pay a bill to be reliant on the whims of the market.
Once your income eclipses your debts, then you can risk investments.
How to Invest and How to Save
The methodology of investing and saving are far more similar than you might expect. Saving your money means giving it to a bank. A bank will turn that money into loans, and the interest rate of the bank will see your savings grow as the bank grows.
Investing money is similar, as you still essentially give it away, but this time to a hedge fund. They will invest your money into venture capital and start-up businesses.
These will allow your money to grow as those businesses grow.
When, where, and how to invest and save is a matter of your own personal trust in these institutions. Use your money responsibly, and stay safe.