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Saving and Investing

Difference in saving and investing

The difference between saving and investing is time. Saving is short term. You put money in a savings account, a certificate of deposit, a money market account, or U. S. Treasury Bill for meeting short-term goals. The amount of interest that accrues is usually small. The cash is considered liquid because it can be sold or accessed in a short period of time.

Investing is intended to be long term. When you invest money, you are not guaranteed that your money will grow. Instead, your money rises and falls with the economy and the type of investment you make. Investing is meant to be long term, so the long-term result of solid investing should be a growth of your money above what you would expect in a simple savings account. Making good investments is the safest way to acquire wealth, but it takes time and involves risk.

Saving should always come before investing, because the dollars you accumulate through your savings plan will ultimately be the dollars you have to invest in those bigger things in life you want.

Paying yourself first

Paying yourself first is one of the best ways to save money. Paying your savings account is as important as paying a regular bill. It puts an emphasis on you. Have money auto debited from each paycheck to go directly into your savings account. If it is deposited before you ever see it or have access to it, living without it is easier. 

Time value of money

The time value of money refers to the relationship between time, money, and interest rates. For example, if you receive $100 for your birthday, and you put it in a savings account that earns 3% interest annually, after one year you would have $103.00. After two years, that initial $100 would be $106.09. You earn interest because you are allowing a bank to use your money for one year. The time value of money illustrates three principles:

  • The more money you have to save or invest, the more money you are likely to earn

  • The higher your interest rate is, the quicker your money will grow

  • The earlier you invest, the more money you will earn

Rule of 72

The Rule of 72  is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual interest rate, you can get a rough estimate of how many years it will take for the initial investment to double. If your initial investment is $6000, and it is earning 3% interest, you will double your $6000 in 24 years. The Rule of 72 is important because it helps you understand compound interest. Interest compounds by adding interest on interest. This makes your money more valuable the longer you leave it in an account.


Risk versus reward is the direct relationship between possible risk and possible reward in a given situation. The greater the risk you are willing to take in investing your money, the greater the reward should be. If you are just beginning to invest, and you have several years before retirement, you will probably be more willing to invest in riskier options than someone who is nearing retirement. The website illustrates the risk/reward concept with the pyramid below.

Notice that investments with the lower risk are at the bottom of the pyramid where it is more stable. As you move higher within the pyramid, the risks become greater, but the expected rewards are also higher.

When you begin investing, you should stay with the choices at the bottom of the pyramid until you have a solid investment history. With the higher tiers comes higher risk. One important thing to note is that there is no guarantee that the higher-risk investments will give you higher returns.