In todays economy, there is a need to be financially stable. Financial stability ensures that in time of need, one does not succumb to money problems; it ensures that you can always have the means to sustain yourself. In this regard, savings and investments are the two main ways of building a financial foundation. Investments and savings, when started ata early age also ensure a stable future.by saving, one is in better position to deal with unexpected financial challenges and expenses. Furthermore, investing also helps to maintain and expand ones wealth over a long duration of time. However, before embarking on the various ways to save and invest, one needs to know the difference between the two in order to know which best utilizes and compliments ones income.
Majority of people use the terms savings and investments interchangeably. Although savings and investments are related, there are two distinct processes. The two processes have different purposes and play distinct roles in ones personal financial status. Savings involves the process of putting aside and placing it in a safe place. Furthermore, this money is liquid, meaning that money in savings can quickly be accessed in a relatively short time. This duration is typically not more than a few days. Examples of savings include checking accounts, saving accounts and certificates of deposits. Because savings are typically insured by the federal deposit insurance corporation, one does not run the risk of losing savings. On the other hand, unlike savings, one has a greater risk of losing money in investments. Investments involves using ones money, referred as capital, to acquire an asset that has a safe and acceptable rate of return. investments typically have a high rate of return as compared to savings however they are more volatile (Garman, and Forgue 2011).
Knowing the definition of the two processes thus makes it easier to determine which strategy to utilize to achieve financial stability. Consequently, before deciding how ones income is to be allocated between savings and investments, one needs to do a financial checkup. This involves determining the ones debt, ones short and long terms, lifestyle and age, monthly expenses, and the source of income (Garman and Forgue 2011). For instance, in my case, through the financial checkup process, I determined that I spend about seventy percent of my income every month. In this regard, only thirty percent of the incomes remains for savings and investment options. According to the goals set, most are long term goals, furthermore, my emergency fund is fully funded, as such, the remainder of income is divided as such; five percent towards savings with twenty-five percent going to investments.
There are a variety of investment options available. The most common types include but not limited to, bonds, mutual funds and stocks. Bonds are debt instruments. Bonds act as loans taken out by an organization or the government in return for a preset rate of interest that is paid by government or organization to the person purchasing the bond over a specified period. The bond, while its active pays interests before it expires on a specific date. Mutual funds on the other hand involve investing money in a professionally managed portfolio of assets that can contains a variety of bonds, stocks market related investments among other investment opportunities. Stocks are investments that give the purchaser partial ownership of publically traded company (Wells Fargo, 2016).
In my case, the most appealing and logical investment opportunities as per the above definitions are bonds and mutual funds. Bonds in this regards are not as volatile as other investment opportunities, such as stocks. On expiration, I will be assured the total face value of the bond as well as the interests accrued. The other investment option is the mutual funds. The mutual funds have various investment options thus investments will be spread out reducing the risk of losses.
Garman, E. T., & Forgue, R. (2011). Personal finance. Cengage Learning.
Wells Fargo. (2016). Investment types and terminology. Retrieved from Wells Fargo: https://www.wellsfargo.com/financial-education/investing/investment-types /
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