Every successful investor must begin by understanding the difference between saving, investing, and speculating. If you get those confused, you run the risk of losing a lot of money.
Let’s start with saving…
Saving can be defined as the process of setting money aside in order to make a purchase a short time in the future — typically, under 3 years.
The most important element when it comes to saving is the safety of your money. You don’t want the value of your savings to fluctuate, because you’ll need all of it to make your purchase. There are several options available to help you save money: savings accounts, money market accounts, and certificates of deposit, for example.
Unfortunately, as a trade-off for protecting your money, saving typically pays interest at a rate that is just a bit higher than inflation. If you want to earn more than that, you’ll have to look to investing.
Unlike saving, investing is a long term process. It often involves committing a portion of your money to owning a share of a business, with the expectation that you’ll receive a higher return than inflation.
The most important factor in investing is the growth of your money. And there are many ways to invest, with stocks, bonds, and real estate being the most popular.
However, once again there’s a trade-off. While investing typically offers better returns than saving, it also carries more risk, as the value of your investment bounces up and down — at least, when looked at in the short term.
To be a successful investor, you must invest your money for at least 3 years. That’s because over longer periods, the value of your money will appreciate enough so that even if the value of your investment falls over a short period of time, it will still be higher at the end of the period than it would have been if your money had been sitting in a savings account.
But what if you need to grow your money quickly?
That’s where speculating comes in. Speculating involves putting your money at risk with the hope that you will earn a high return in a short period of time. Day trading is a good example of speculating, where stock trades are opened and closed in a period of minutes or hours.
Speculators can win big, but they can also lose everything.
So to sum up:
Save to protect your money. Invest to grow your money. Speculate to gamble your money.
