FINANCIAL FOCUS: Saving is good, but it’s not investing

Joe Faulk

Joe Faulk

Published: Thursday, February 13, 2014 at 12:37 PM.

It’s good to have savings. When you put money in a low-risk account, you can be pretty sure it will be available when you need it.

Still, “saving” is not “investing” — and knowing the difference could pay off far into the future.

Think about it this way: Saving is for today; investing is for tomorrow.

You need your savings to pay for daily expenses, such as groceries, and your monthly bills — the mortgage, utilities and so on. In fact, you might even want your savings to include an emergency fund containing six to 12 months of living expenses to pay for unexpected costs, such as a new furnace or major car repair.

These are all “here and now” expenses — and you could use your savings to pay for them. But for long-term goals, such as paying your children's college tuition and enjoying a comfortable retirement, most individuals typically can’t rely on their savings — they'll need to invest. That's because investments can grow — and you will need this growth potential to help achieve your objectives.

Suppose you put $200 per month into a savings account that pays 3 percent interest (which is actually higher than the rates typically being paid today). After 30 years, you would have accumulated about $106,000, assuming you were in the 25 percent federal tax bracket.

Now, suppose you put that same $200 per month in a tax-deferred investment that hypothetically earned 7 percent a year. At the end of 30 years, you would have about $243,000. (Keep in mind that you would have to pay taxes on withdrawals. Hypotheticals do not include transaction costs or fees.)

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