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INVESTING
v/s SAVING
Traditionally, saving has been viewed as quite
different from investing. In most savings alternatives, the initial
amount of capital or cash remains constant, earning guaranteed rates
of interest.
The capital value of investments can go up or down. Returns are not
guaranteed. However, creation of money market funds and deregulation
of the banking industry have resulted in a variety of savings
options that earn variable rates of return.
Savings provide funds for emergencies and for making specific
purchases in the relatively near future (generally within two
years). The primary goal is to store funds and keep them safe. This
is why savings are generally placed in interest-bearing accounts
that are safe (such as those insured or guaranteed by the federal
government) and liquid (those in the form of cash or easily changed
into cash on short notice with minimal or no loss). However, these
generally have low yields. Because of the opportunities for earning
a higher return with a relatively small pool of funds, some
financial experts suggest that savers consider slightly higher risk
(but liquid) alternatives for at least part of their savings.
Saved money is insurance. It is insurance against risk, against
losing your job, against having a major unexpected repair bill or
medical expense in the family. It is the backbone of you and your
family’s financial well-being. Saved money grants you financial
security. And the more you save, the more financial secure and
independent you will be.
The goal of investing is generally to increase net worth and work
toward long-term goals. Investing involves risk. Risk of your stocks
losing money, or even going bankrupt (Enron, MCI, the airlines, etc.
etc.). Risk of interest rates rising, and bond prices falling. Risks
of your broker swindled you, or coerced you though his sales pitch
to buy speculative investments. Risks of the economy. Risks of a
particular industry. Risk of losing your principal. Risk of losing
it all, and then some (such as with margin calls).
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