Investing and saving

There is a huge difference between investing and saving and getting clear on this is vital to building long-term wealth.

‘Investing’ means putting money away to generate wealth for the long-term. It is invested in growth assets and never cashed in and spent. If you do sell an investment asset, the money should be put back into other investment assets.

‘Saving’ means putting money away to pay for specific items in the future. Saving is just deferred spending. Once you buy the item you’re saved up for, the money’s gone and you have to start saving all over again for the next item.

Both investing and saving are very important parts of your financial plan, but realising you are never going to build wealth if you spend first, save next and invest last is key. Investing for the future should be your first priority, not your last.

It’s easy to change the order of your actions so they happen like clockwork each time:

1. Invest first – have part of your salary paid directly into your investments
2. Save next – have the balance of your salary paid into a high interest rate account
3. Spend last – when you need cash to pay expenses, transfer it into your transaction account

By getting clear on what your expenses are, you can set up a regular automatic transfer from your high interest rate account to your transaction account to cover your expenses.

The great benefit of this set up is that you can’t be tempted to spend the money allocated for ‘investment’ it because it’s not readily available.

Make a list of the specific items you want to save for over the next couple of years – such as a home deposit, or overseas holiday – and establish accounts specifically for these items.

Remember, small amounts spent here and there can really add up over time and the same principle applies to investing money to build wealth. Small amounts put away regularly and invested wisely can turn into big amounts.

Do you have a system for prioritising your investment goals?