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Saving, investing are not equal
(Omaha World-Herald (NE) (KRT) Via Acquire Media NewsEdge) Jul. 25--Everyone is encouraged to save, but one question people might pose: What is saving?
Is it putting money aside to buy a dishwasher, television set or iPod without having to use a credit card?
Is it money placed in a 401(k) retirement fund or the stock market?
Is it enough cash in an emergency fund to cover three to six months of living expenses in the event of job loss or disability?
Many financial experts draw a distinction between savings and investments. Saving would be having money that is readily accessible and in low-risk investment vehicles such as bank accounts, certificates of deposit and money market funds.
Investments in stocks and retirement funds are harder to pull money from, and they typically hold a greater risk of losses but the potential for higher earnings growth.
"Savings are different than investing," said Terry Headley, managing director of financial planning firm Headley/Scott and Associates in La Vista. "Investing is one tier up."
Headley also distinguished between, on the one hand, savings that should be reserved for emergencies and replenished as quickly as possible whenever an emergency has passed and, on the other hand, "sinking funds," or money set aside for short-term goals such as buying a washing machine or a TV.
"These are earmarked for specific purchases," Headley said.
If people do not maintain a distinction between investing and saving they might have to cash in an investment at an inopportune time, such as when the stock market is down, which could cut into the profits of a stock sale, Headley said.
Kathy Stow of Omaha said she and her husband, Allen, put money into several different categories for savings, such as funds for new windows, replacing carpet or buying a car.
"We sit down every year and decide our big-ticket items," Stow said.
Matt Moore of Omaha said he and his wife, Traci, have a broad definition of savings that includes their 401(k) plan, life insurance, investments and a savings account for their daughter.
"Any kind of thing that helps you prepare for later in life, as well as short-term purchases," Moore said.
Michael James, a financial planner with Waddell & Reed Financial Inc. in Omaha, said saving could be defined as simply putting money away for future spending.
"All money is meant to be spent, it's just when," James said.
Unfortunately, many people's savings consist only of their 401(k) retirement plans. Cashing out of those plans before retirement carries tax penalties and takes away money that could be growing for retirement, James said.
Maintaining an emergency fund and saving for specific goals such as children's education make a lot of sense, James said.
"Life is a lot easier with $5,000 in the bank," he said.
--Contact the writer: 444-1117, joe.ruff@owh.com
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Copyright (c) 2008, Omaha World-Herald, Neb.
Distributed by McClatchy-Tribune Information Services.
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