You need to know about saving and investing to grow your money and to reach your financial goals. The problem is, it’s not always clear how saving and investing are different and how they can work together.
To explain it, we’ll use a chicken and an egg. Not in that old riddle kind of way though. Instead, think of saving like buying a dozen eggs, and investing like buying a chicken to keep in your backyard.
Let’s talk saving first—which in this example means gradually putting money into a savings or cash management account. Saving is kind of like buying a dozen eggs and storing them in the fridge. You’ll grab one or two eggs until you use them all up. Then you’ll have to buy some more.
Basically that’s the idea of a savings account, except your money won’t go bad if you don’t use it. Oh, and you may make a small amount of interest too, which won’t happen with eggs.
Investing is a little different. It also starts by putting money aside. But this time your money goes into an account that lets you buy investments like stocks, mutual funds, or exchange-traded funds (ETFs). So let’s think of investing like buying a chicken to raise. It’s going to take some care and attention to raise that chicken right. And if things go well, your chicken will lay eggs—hopefully lots of them.
But raising chickens isn’t always easy. They don’t always lay the number of eggs you want. Maybe your chicken is too young and you have to wait for eggs. Maybe your chicken has a health issue and can’t lay eggs at all. Or maybe your chicken is a little old and its egg-laying days are over.
As you can see, when you buy a chicken, there’s some risk involved. And that’s an important thing to consider before you invest too. Because you could make some money, or a fox could jump the fence and steal your chicken. Or something like that.
This next part is super important, so let’s drop this chicken/egg comparison and get to the point. When deciding to either save or invest, your time frame is key. For short-term things, like going to see a movie, grabbing lunch, or paying for gas, you might want immediate access to your money. So a savings or cash management account makes sense.
But if you have a longer timeline and you don’t need your money right away, you could consider investing instead. Like if you want to buy a used car before heading off to college in a few years. You might even think about investing if you don’t have specific plans for your money, and just want it to grow over time using the power of compound interest.
Both saving and investing can help you achieve your money goals. And they can work really well together, so you don’t have to choose between them. But remember this: If you’re not ready to take care of a chicken, you might want to start out with some store-bought eggs first. Then work your way up to buying the chicken.