Saving vs Investing — Which Vehicle Takes You Closer To Your Financial Goal?

I cant explain the difference between saving and investing any better than what is expressed in the caption of the above photo.

“Savings are liquid funds that can be used when the need arises, while investments are for wealth building and should be tucked away to grow for the next 5 to 7 years.”

Very concise and to the point! That’s another way of saying, savings are for immediate and short-term expenses and investments are for future – and hopefully – long-term allocations such as retirement.

Mutual Fund — 2-Year Time Frame!

“Our favorite holding period is forever.” –Warren Buffet

Some weeks past I have a client who inquired about investing in one of FAMI Mutual Funds. As always been the case, I asked in response to her email: “What are you investing for? For retirement, college fund, preparing for a start-up capital? What is your target date for attaining that goal? And most importantly, how much is that in monetary terms?”

My client replied that it’s for funding the start-up capital of their planned small business which will be launched in two years time.

“Two years to reach the goal using mutual fund?” I thought to myself. She needs to know as early as now that mutual fund is not the right vehicle for that kind of financial goal, for two reasons.

1. Based on our prior email exchanges, I realized that securities investments and mutual funds are something new to her.
2. I don’t want her to blame me or herself when she decides to put all her money in a mutual fund only to see to lose its value after two years.

However, I also realize that she really wanted to get a hands-on experience with mutual funds and perhaps proper guidance on how to do it. So I went ahead and sent her my reply:

( See also: Do-It-Yourself Personal Investment Plan. )

The approach would allow her to put the money in a very safe and secure vehicle that is already familiar with – that is, in a regular savings account. Plus, it would also give her the taste of what it’s like to invest in a mutual fund, while I coach her along the way.

Luckily, she agreed with my suggested approached and proceeded to invest in First Metro Save and Learn Equity Fund with at least 2 years time frame.

I’m not the type who fools people into believing that investing is a sure thing. No, it’s not… Never!

The truth of the matter is, when you invest in a mutual fund ( or stocks, bonds, unit investment trusts) there is really NO guarantee of gain. Mutual funds may already be carefully managed or highly diversified to make the underlying investment safe, secure and profitable to the investors, but the risk of losing is still ever present.

( See also: The Risks of Investing )

There is always that Risk-And-Reward trade-off in any kind of investment.

You want higher return? Then be prepared to risk more.

Afraid of losing money? Then pick something with lower return potential.

Profit and Loss are two sides of the same coin.

The beauty of investing in mutual funds is that they are guided by their respective Investment Objective, which they should adhere to. Your job as an investor is to determine your own objective and find a mutual fund that matches with that.

Examples of Mutual Fund Investment Objectives are as follow:

1. Safety – Preservation of capital is the name of the game here. That is, the fund aims to protect your money from loss. If you are forever afraid of losing, this is the mutual fund for you.

Example mutual fund: The First Metro Save and Learn Fixed-Income Fund.

2. Income – Regular flow of current income is the guiding principle of the fund.

Example mutual fund: The First Metro Save and Learn Balanced Fund.

3. Growth – This fund seeks to increase the value of its underlying assets over a long period of time. This is achieved by investing in a carefully selected common stocks. This type of mutual fund is a good match for aggressive investors who are prepared to accept the risks associated with higher return potential.

Example mutual fund: The First Metro Save and Learn Equity Fund.

Whereas in a Savings Deposit Account you have no other choice, mutual funds offer a way for your own financial objectives match with a particular mutual fund.

(Good to know: 7 Advantages of Investing in Mutual Funds )

Your Financial Goals and Suggested Invesment Vehicle

“A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life.
–Suze Orman

At the start of this article, I partly touched on the subject of investment time horizon. This time component is an important aspect when setting a financial goal. Napolen Hill, the best-selling author of the classic Think and Grow Rich, aptly puts it: “A goal is a dream with a deadline.”

Here is a brief guide that helps you determine the right investment vehicle –- not just mutual funds — to use when aiming for your finacial goal.

1. Short-Term Goal (2 years or Less)

• Emergency Fund
• Family Vacations
• Wedding Preparation

Put your money in:

• Savings Account in bank or Cooperative
• Time Deposit Account
• Money Market Fund

2. Medium-Term Goal (2 Years to 5 Years)

• Down payment for house or new car
• Family Vacation
• Capital For Small Business

Put your money in:

• Retail Treasury Bonds
• Money Market Fund
• Fixed-Income (Bond) Fund
• Balanced Fund

3. Long-Term Goal (5 Years or more)

• Retirement Fund
• College Fund
• Gift to Grand Children

Put your money in:

• Equity (Stock) Funds
• Exchange-Traded Funds
• Real Estate Investments

Though not complete, the suggestions above should give you a head-start on how to go about selecting the asset class for hitting your financial goal.

Joke on Saving vs Investing

Question: Why are Jews wealthier than Christians?

Answer: Because Jesus saves, while Moses invests. 🙂

I was laughing my heart out the first time I heard of that.

It just nails the difference between saving and investing.