1. What type of financial goals is saving most appropriate for?
Savings should be used for future known expenses with a shorter timeframe. It matters less what the goal is and more when the money is needed. It is essential to plan effectively to meet your objectives.
2. What type of financial goals is investing most appropriate for?
Investing is for longer-term needs and goals. This could be for college, a dream home, a dream vacation, and, obviously, retirement, among other things. Invest when you can benefit from the time value of money and the rule of 72.
3. What are the key differences between saving and investing in terms of risk, return, liquidity, etc.? Why are these important, and how do they factor into someone's decision of whether to save or invest for a particular goal?
There are substantial differences between saving and investing, and they serve very different purposes and meet very different needs. They also have very different risks. Because savings should be used for more short-term objectives that may be needed sooner than five years, they should not take on the risk of market volatility and potentially be down in value when required. Market risk for saving would be unwise.
However, when investing, you will likely need higher returns to meet your objectives. You can handle market volatility much better over a longer timeframe. While market volatility and liquidity may be the bigger issue for a savings account, the Rule of 72 tells us that using savings vehicles for what should be investments can be equally risky. The rule of 72 illustrates why, for example, an investment starting with $50,000 and adding $500 a month for 25 years would result in over $1 million at a 10% rate of return, but at 2% it would be less than $175,000. Another risk to consider when investing is inflation, which has historically been over 3.5%. If you have to pay taxes on the gain, especially with only a 2% to 3% gain, it may indeed be a guaranteed rate, but also a guaranteed failure and loss.
4. What advice would you offer our readers to find the balance between saving and investing for their financial goals?
It is essential to have a comprehensive plan in place that covers all goals and needs. Do not fall prey to fear or greed and invest or save when appropriate.
5. Is there anything else on this topic you think our readers need to know?
An investment can also have tax advantages when done in a retirement account that should not be used for saving, nor should savings vehicles be used within a long-term retirement account.
I recommend that readers meet with a financial advisor who has a teacher's heart and is willing to help them plan for each goal and objective. It is essential to both save and invest, and vital to use the right vehicles in each case.