Parenting Blog

What Are The Differences Between Saving And Investing & How To Do Both On A Budget

Saving vs Investing

This post is sponsored by Lexington Law

The two are often used interchangeably but there are some key differences between saving and investing. Knowing how saving and investing are different, and knowing how to successfully do both on a budget, will help reduce stress in your day to day life and increase the quality of your life in the near and long term future. Having a rainy day savings and a long term investment may also help you maintain good credit.

The Differences Between Saving and Investing

Let’s start with saving, because this is something you probably already do in some form or fashion today, even if you don’t realize it or don’t think you are doing a good job of it, even if you are in debt and are actively working (or needing to work) to repair credit.

It might be a Christmas club account at a Credit Union or saving up for a new video game system or vintage guitar, I guarantee you are saving right now. Here are some smart ways to save.

Some banks have introduced a smart savings feature through debit card rounding up.

Here’s how it generally works: You use your debit card to spend $43.27 to fill up your gas tank. $44 will come out of your checking account connected to your debit card for that transaction. The extra (rounded up) $.73 is deposited into your savings account. Easy peesy, right? This is a modern version of tossing your coins from your back pocket into an old milk jug or piggy bank at home. 73 cents might not seem like much as you drive away from the gas station but over time you will accumulate hundreds and maybe thousands of dollars, all without feeling anything substantial missing from your checking account. It is a smart and simple way to save for short term needs and wants.

Moving spare digital change into a savings account for you is a bit of a subtle game changer for people who have had struggled to save money. Maybe your bank offers this service. Give them a call to ask!

Of course, that old milk jug and piggy bank is still super legit too! The old fashion ‘tossing in spare change’ way to save remains smart and useful! It’s also fun and not just for kids. My family is currently saving our spare change and stray dollar bills in a big empty iced tea bottle, to help us pay for a once in a lifetime trip to Tokyo in 2020 for the Summer Olympics!

what are the differences between savings and investing

Another way to save is to take a $5 from every ATM withdrawal and $10 from every paycheck, and put it in an envelope in your sock drawer. Bury it down in there so you don’t think about it or see it. Don’t laugh! I did this very thing since January to pay for some solo travel this month. Over the last nine months, I accumulated over $700! That savings is coming out from under my socks to pay for all the soccer matches I’ll be seeing in England as you read this! That’s savings in a nutshell: setting aside money for short term needs and wants. You don’t put savings at risk — no stocks, mutual funds, etc — because you don’t have the time to put your savings at risk. Risk belongs to investing.

You may be investing already too! Do you contribute to your employer’s retirement plan? Have you opened up an IRA or Roth IRA? If so, then you are an investor. Investing means putting money aside for your distant future. There are possible tax benefits for investing for your future! This is money that you can and should take some risks with because you will not be touching it for at least a decade, but likely a few decades, and over the long haul it will have a chance to grow if invested on your behalf (historically speaking but past performance is not indicative of future results).

what are the differences between savings and investing

Pro tip: pick a mutual fund or a handful that are well diversified, keep fees and costs super low, and then Do. Not. Look. At. Your. Balance.

Your investment will fluctuate in value meaning it will drop, rise, drop again. Do not panic! You do not need this money for a long time. Start with asking about your employer’s retirement plan and try to contribute as much as they may match (a % of your pay that will be deducted before your income is taxed). You will not feel your pay reduced much and will be investing for your future on a budget.

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6 Comments

  1. We have the age old piggy bank on the dresser for us and kids. Also we have opened IRA’s for me and my wife and with the fact the Fidelity Investments has a zero cost mutual fund options itnwas really Easy. The kids also have their own investment accounts with Fidelity. My wife works there if you couldn’t figure that out. Great job I feel like more conversation like this should be happening with the younger the better.

  2. Your example of taking $10 out of every paycheck and $5 from every ATM withdrawal is great advice. We call that paying yourself first. Another great thing to do is anytime you get a raise or an unexpected windfall of money is to right away allocate that money towards saving/investing. When I received a small raise earlier this year of about $150/month, I set up my automated systems to put $50/month into our investment account, $50 into our charity account, and $50 into our mortgage payment. So that extra money is automatically allocated without me ever seeing it hit my bank account, so I’m not tempted to spend it elsewhere. Pay yourself first!

    https://decadetofreedom.com/one-year-milestones-401k-and-a-pay-raise/

  3. That’s another terrific idea, Grayson! Thanks for sharing your paycheck/raise scenario!

  4. Outstanding, Brock! Glad you, your wife and your kids are well on the way to financial freedom!

  5. We did the $5 savings plan years ago—basically, if I ever got a $5 bill, I had to put it in an envelope hidden away in a drawer. I hardly ever used cash but it was amazing how much I saved in just over a year—-it basically paid for our out-of-pocket expenses for a family cruise we took. I still try to do it but I find myself “borrowing” from that envelope when I need $5; I think I need to hide it a little better or really vow not to touch it!

  6. That’s amazing! It can be super stealthy and simple, right? But yeah, I hear you about dipping into the envelope — I did the same too often from my English football fund envelope, every time the girls needed field trip money, a rec night fiver, etc.

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