Saving Versus Investing

Whenever you hear a financial expert recommend saving a certain amount of your income, the word saving might mean different things to different people. I have my own definitions, which I will explain.

Saving is simply setting aside the money for either investing or future use(rainy day fund). Investing, is what you do specifically with the money that you intend to grow. This is the money you intend to put to work, so it can create more money which can then create more in the future. This is what long term compounding is all about.

It's important to distinguish between these two terms. Simply saving money is not any way to grow your wealth over the long haul. You must put that savings to work through investing in order to grow any sizable nest egg. Saving is only the first step, you have to follow through with specific investments to get the full benefit.

My favorite forms of investing for the long term are dividend paying stocks inside a post-tax account such as a Roth IRA, dividend paying whole life insurance policies which are also post-tax, and low cost muni-bond funds if you live in an area that doesn't levy a state income tax. These instruments are ideal for putting your money to work once you have set aside the savings, and none of them require you to wait until years and years down the line before you know exactly how much these investments will be taxed. This takes the headache of paying taxes out of your life in this one area, since all of these methods require funding through after tax dollars.

So if you have been doing a good job of saving your money, don't forget the next step, which is the put the money to work for you with the process of compounding interest. These two steps are the basis of building wealth and they have to be followed diligently in order to work.