Saving versus investing

DAY 4 – Financial Planning Week 2012

Now that you’ve got a surplus of cash to cover regular, planned short term and emergency expenditure you can start thinking about what to do with your surplus cash.

Remember from day 1 that the only purpose of money was to spend it? Well that’s true but what should you do with the money before you spend it? To answer that I need to explain the difference between savings and investments in a financial plan.

Savings have a very important role and should be held in cash. They are used to cover planned and emergency expenditure. They form part of your budget that gives you the piece of mind of having access to money just in case – and that’s the problem.

Keeping money in cash in the long term means that the money loses value in relative terms due to inflation. Let me put that another way: the buying power of cash reduces over time. The buying power of £100 today is much less than the buying of £100 in 1992.

But that’s OK. The role of savings is not to provide returns and to out pace inflation. It’s role is to provide the peace of mind that comes from knowing you’ve got your everyday expenditure (and emergency expenditure) covered.

So what do you do with everything else that’s surplus to your savings requirement?

Invest it, that’s what.

Invest it to achieve long term investment growth to try and keep up with (and perhaps even outpace) inflation. Now I’m not going to go into investing and what it should look like.  That would be a whole new series of blogs. All I’ll remind you off is that risk and return are related and diversification reduces risk.

So there we have it. Savings for planned and emergency spending, investing for everything else.

Picture Credit: Carl Richards (http://www.behaviourgap.com)

Day 1: I’m going to start by challenging your view of money (if you have one).
Day 2: I’ll explain why budgeting is essential and how it will help.
Day 3: I’ll give you four simple rules to follow to create spare money in your life.
Day 5: I’ll explain how using a financial planner can help you.

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