Short-term savings and investments may seem the same but these two savings vehicles are unlike each other. Short-term savings are for emergencies and for expenses, big and small, in the next few years. Investments are for your future wealth that you can use for any of your big goals.
Would you like to earn slowly but surely, with little risks involved? Would you rather choose to put your money at high risk but also with higher returns? Would you prefer that you can easily access your money or be willing to withdraw it after a specific time?
There are a lot of questions that may come to your mind when you ponder about saving or investing. It is actually better than not planning to set aside part of your hard-earned money. That is why it is best to know and learn the basics first and master the knowledge gradually. This is part of your personal finance and financial literacy.
While it is best to start early, starting now, even with a nearly ripe age, is the best time to save or invest, or save-and-invest. Read on to find interesting nuggets of knowledge and wisdom.
Scenario Examples Where You Can Use Your Short-term Savings
Mr. X lost his job this year and he is the breadwinner of a family of six. Luckily, he is able to save money for a year’s worth of basic needs expenses.
Dinah received a diagnosis from her doctor that she has a delicate illness that would need a few years medication. She has certificates of deposit where she can get money and the accumulated interests. She does not need to sell her stocks.
The family is planning a vacation to Cambodia next year but each has to pay for his/her own expenses. Ira has a ready savings and checking account that will support this plan.
Scenario Examples Where You Can Use Your Investments
In the next 5 years, Mr. Santos will retire from the company where he had worked for 30 years by that time. He is not a bit worried how he is going to get by because he has market shares he can sell.
The grand matriarch of the family plans to pass her riches, in the form of various investments, to her four grandchildren.
Little Lina’s father chose a mutual fund, managed by a professional fund manager, intended for her future college education.
In order for you to understand more what short-term savings and investments are, some of the common types that fall under these two investment vehicles are as follows:
Common Types of Short-term Savings
The type of short-term savings vehicle that yields profit to the smallest amount compared with the rest. They are easily accessed which means you can readily get cash anytime you need it. Most banks allow six (6) withdrawals making your savings account highly liquid. This also means that you can easily transfer your savings account to another vehicle with little costs to consider.
Like the savings account, checking accounts are also highly liquid but you can only access your money by writing a check. You can withdraw and deposit using your checking account, too. You can pay using them via automatic transfer or via a debit card.
Money Market Funds
Like savings and checking account, money market funds are highly liquid, too, but gives a better yield. Considered a low-risk type of fund, this mutual fund invests in low-risk securities or short-term bonds.
Certificates of Deposits
Certificates of deposits are short-term investments that you can only withdraw after a specific time (usually as short as three months or as long as five years). They offer a higher yield for the money you originally deposited. When it reaches its maturity, you can withdraw your money and the accumulated interest payments.
Common Types of Investments
Stocks are certificates that make you own part of a business. When you buy shares of stock, you represent a share of ownership of a company or you can buy that part. You do not literally ‘own a part of the company’ but you are in a form of a contract.
An excerpt from Dave Kansas’ book – The Complete Money and Investing Guidebook – clearly explains bonds.
‘Bonds are a form of debt. Bonds are loans, or IOUs, but you serve as the bank. You loan your money to a company, a city, the government – and they promise to pay you back in full, with regular interest payments. A city may sell bonds to raise money to build a bridge, while the federal government issues bonds to finance its spiraling debts.’
Professional money managers manage mutual funds. This investment vehicle allows you as an investor to pool your money along with other equities, bonds, and other securities. Your professional manager will advise you to purchase them depending on how they see it. There is a fee when you buy a share.
There are a lot more types of investments and their classification is according to ownership, lending, and cash equivalents. Ownership investments include stocks, business money, real estate business, and precious objects. Lending investments include the savings account, the checking account, and bonds. Cash equivalents include money market funds
When you are contemplating between short-term savings and investments, you also have to consider a lot of factors like the returns or yield, liquidity, earnings, fees, other benefits, and volatility. You also have to consider how much money you can afford to save or invest.
To end this topic, you save because of an immediate need or an unforeseen emergency in between the next three years. You invest to make lots of money that you can use on anything you would like to spend them.
Happy Saving and Investing!
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