Saving or Investing?

by Tom Tousignant

in Blog, Financial Safety, Wealth Building

I came across a great four page booklet from the North Dakota State University on Saving or Investing.  Many think that saving and investing are the same thing, but, there are important differences.

First of, why North Dakota?  Isn’t it freezing there?  Actually, I just checked, and the temperature right now is only 7 degrees cooler than here in Charlotte NC – but, it will get colder this winter.  Maybe the cold nights allow North Dakotan’s more time to think about how to handle their finances?  The real reason that ND piqued my interest is that they have the lowest unemployment rate in the country right now, and, with the new oil drilling technology, are actually having a financial boom in 2012.

If you want to spend 10-15 minutes reading some useful tips on saving or investing, you can download the pamphlet here.

A key highlight I picked up right away is something I learned a while back and repeat all the time.  When considering is something is a good place to save your money, you have to consider is it:

  1. Safety – is the principal safe?
  2. Return – Is the return guaranteed?  What Rate of Return can you expect?
  3. Liquidity – How long will it take to get your money back, and are their penalties?
  4. Inflation – how will this location protect you from the effect of inflation or deflation?

Most places to save your money are ok in 1-2 of the 4 key areas.  For example, a savings account is typically FDIC insured, so it’s safe.  you can get your money anytime, so it’s liquid.  However, you will get almost no return in a savings account right now (the cost of safety and liquidity) and over time, inflation will eat away the purchasing power of your savings.

Since this is a home ownership related blog, I have to point out that Equity in your Home fails 3 of the four tests – it’s not safe from home prices falling, there is no return on home equity, and your equity is not liquid. It feels good to have home equity, but, don’t count on it as part of your savings.  Home Equity is not a savings account!

Again, if you want to spend a few minutes learning the difference between saving and investing – download the article here.

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