Saving money is an important part of every financial plan. Saving money will help you plan for retirement, your child’s education, and/or a rainy day. Whatever your purpose for saving, you have to have some sort of plan in place to have a portion of your monthly income placed into a savings account, a certificate of deposit, or some other no risk account.
It is important to note that savings can be considered an investment. Savings accounts and certificates of deposit carry interest rates that you collect during the life of the account or deposit. As such, your savings are accumulating money. However, the one distinct difference between a savings account or a certificate of deposit and a true investment is that the value of the principal in a savings account will not increase.
For example, if you buy stock, you can make money on dividends and interest payments. However, the primary way that people make money on stock is by the increase in the stock price. If you buy stock at $1.00 per share and you sell at $2.00 per share, in addition to all of the dividends and interest, as applicable, that you collected, you will also receive the gain from the stock price. A savings account, on the other hand, cannot increase in value outside of interest payments.
The easiest way to distinguish this is to take away all interest and dividends. If you deposited $500 in a savings account with no interest rate, no matter when you withdrew the money (whether one month, one year, or ten years from now), your account would have only the $500 in it. Stock, on the other hand, can increase in value. Therefore, if you took that same $500 and bought 500 shares of $1.00 stock and in one month the stock was worth $2.00 per share, this means that you could withdraw $1,000. Your money has doubled.
Keep in mind, however, the potential for increase in value comes with an equal chance for a decrease in value. Although in the above example, the stock price doubled, it just as easily could have decreased in value to $0.50 per share. Thus, if you withdrew your money, you would have $250 while the savings account would still have $500.
The primary difference between saving money and an investment is that an investment has the chance of appreciating or increasing in value. Both a savings account and an investment can collect interest, but only an investment has the potential for gain. Keep in mind, however, that although investments carry the potential for gain, they also carry the potential for loss. As such, should you choose to partake in an investment, you will sacrifice safety for risk in hopes that your investment appreciates or increases in value.