If you majored in a business related field, then you probably know the difference between investing your money and saving your money. You understand that an investor which owns a business or real-estate property can find themselves unable to pay their bills. The rest of us who did not major in a business related field find it hard that an investor can reach a point where they are unable to pay their bills. What about all the money that’s in their investments? What happened to that?
Let’s define what investing is and what saving is:
Investing money is a process of using capital (a.k.a. money) to buy an asset that you think will generate a return over time.
Saving money is the process of putting cold, hard cash aside and keeping it safe and liquid.
Liquidity means the fluidity of money or how quickly can an asset (such as a house) be turned into cash. The stock market is very liquid because you can sell your stocks almost instantly to someone who wants to buy it at a fair price. A house isn’t very liquid because it takes time to sell a house and if you need money tomorrow, chances are you can’t sell your house tomorrow. Lack of liquidity can cause panic which can lead to recessions. The lack of liquidity in the real-estate market or the stock market can cause prices to fall to unprecedented amounts. (Read article on Federal Reserve)
Investing has its advantages. If you have the mindset of Warren Buffett, George Soros or Carl Icahn then by any means please invest right away! If you are more of a conservative person and like to feel safe with your money then that’s fine, and respectable. But keep in mind that saving can cost you more than investing. The reason is because of the “hidden tax.”
What’s a hidden tax you ask?
The hidden tax is also known as inflation. If you save your money, inflation is your enemy and if you invest your money, inflation is your friend. Let’s say you have $1,000 and are saving it under you mattress. Well my friend, the Federal Reserve Bank in the United States has an inflation rate target of roughly 3% a year. This means that if you store that $1,000 under your mattress, a year later the value has decreased about 3%, that’s like… $30 less!!! You might not feel the pain of losing $30 but how about when we start talking about $100,000 or $1Million. Hurts now huh? The beauty of the stock market is that (at least) it is inflation proof, but if you make good decisions then you will beat inflation and beat the average return (~10-15% a year).
Investing can be a great thing because you can win money, or can be a horrible thing because you can lose money. The beauty about it is that if you know what you are doing you can increase the probabilities in your favor. Saving your money can also be a great thing because you have cash to buy things you want right away. You also have instant cash in case of emergencies. However, if you know that you don’t need to use some of you savings for at least 1 year or even 2 years, then why not look into investing it?
As always, if you have questions contact me @arberdoci.