(10 Minute Read)

Saving and investing go hand-in-hand. It is very simple to save money in a savings account for a rainy day (also known as an emergency fund), but there is a lot more involved in investing. Often times, it can feel so complicated and confusing, most people simply walk away and decide not to deal with it at all…but if you take this route, you are making an incredibly grave mistake–one that could harm you and your financial future.

The Difference Between Saving and Investing

In practice, saving and investing money are the same–you don’t spend the money, and you put it away for a later day. They key difference is this:

You save money for a short- to mid-range financial goal. You invest money for the future, the more distant future.

When we use the term “saving” we are discussing an event that requires a relatively low amount of cash in the relatively near future. Examples of this include buying a car, paying for an emergency like replacing the HVAC system in your home, or going on a vacation.

When we use the term “investing” we are discussing putting money away in more than a simple savings account so that it can grow and yield more money for you in the distant future (think: 10 or more years in the future). Examples of events you may invest for include retirement, saving for a down payment for a home, or for your child’s college fund.

While saving and investing seem like they could be interchangeable…

The key difference between saving and investing is where you place the money.

Short-term savings should be placed in a low-risk savings account; investments should be placed in an account that will yield more income for you, but there is a level of risk involved with investing.

Your savings should be placed in a low-risk account that is liquid, meaning you can get to the money easily in an emergency or when you are ready to make the big purchase you have been saving for. There are three great places to store your savings (you can read my recommendations here).

However, the purpose of an investment is to bring in a return. In order to do this, you will need to invest in (brace yourself), the stock market. Here, you will not be able to access your money as easily, but it has a greater opportunity to grow, which is the purpose of investing in the first place.

Should I Invest?

I think we all know the answer here. Yes, you should invest.

As I said before, I will say it again…military members, we are all very disciplined in numerous aspects of our lives, from our work, to training, to maintaining physical fitness and even balancing work-life-school-family-everything else in the world. Since we are so disciplined in these areas in our life, why not try bringing a little bit of that discipline in to our finances too?

Investing money is essential so that you will be prepared for the future.

At the very least, you should invest in yourself so you will be prepared for retirement. Depending on when you plan to retire, and how much income you will need to sustain your lifestyle in retirement will determine how much you need to invest now.

Investing money is essential for meeting your long-term financial goals, and for ensuring you are prepared for the future.

The bottom line is this–if you earn money, you need to invest.

At the very minimum, you should invest for your retirement. If you have children and would like to save for their college, this is something you should invest for as well.

Investing money is something that every person should do, and I’ll outline the criteria below regarding whether or not you need to invest:

If you can answer “yes” to the question below, you need to save money

Do you have an income of any kind?

If you answered “yes” and determined that you need to invest to be prepared for the future, where should you get started?

Where do I begin?

Investing money, like saving, is a simple financial principle to understand, but getting in to the weeds of when, what, how, and where to invest can be so intimidating, it seems like someone would have to have some sort of special psychic power to know when and where to invest so their money will grow.

But the first part to investing is this–if you can save money, you can invest it. Again, saving can be difficult to do in practice, but if you have a plan to save and invest your money, you will be on track to meet your financial goals!

The plan to invest money is the same one you used to save money, with some minor variations on the execution of these steps. Your investment plan can be done in these simple steps:

1. Determine what you are investing for
2. Calculate how much money you will need to have invested
3. Decide where you will place the money

Do these steps look familiar? That is because the plan to save and invest money is identical, the only difference is where you will be placing the money, and the numbers we are working with will be much, much larger and over a longer period of time.

1. Determine what you are investing for

There is a limitless amount of things you could save for, but due to the nature of the length of time required for investing, paired with the risk involved with investing, I recommend only investing for things that you intend to purchase at least 5 years in the future.

The 5 Year Rule

The stock market is volatile, we all know this. Just look at how greatly it fluctuates during a crisis like the 2008 crash or COVID-19, and you will see how easy it is to gain, and lose, money. However, the market is a lot like a roller coaster, with all its ups and downs. If you are planning on saving for something in the short-term (which you will purchase in less than 5 years), then you should place your savings in a low-risk savings account.

However, if you are planning on making a large purchase, or are saving for something that will occur more than 5 years in the future, then investing could be the way to go.

The reason for the 5 year recommendation is because it will give the market enough time to balance out. Let’s say you want to start saving for a down payment on a home. If you are planning on purchasing this home in the next few months, it would not be a good idea to invest this money (let’s say in something like a mutual fund), because you would have likely lost more money today than you put in a few months ago. This would be an overall bad situation because you will now have to delay the purchase of your home until you regain this money…or worse…if you pulled out your money in a panic because of the falling market, you will have permanently lost that money.

With the same scenario, let’s say you start saving money for this home you intend to purchase in the next few months and placed that money in a low-risk money market account. Now, even with the falling market, it’s not as big of an issue because you would not have lost much money at all and can still continue with the purchase as planned.

If you have plans to purchase a home within the next 5-10 years with the down payment you are saving, then this would be a good time to consider investing. Even with the falling market, you will have plenty of time for the market to recover, and you will see the return on your investment over the longer period of time.

Again, when you think investing, think long term. We’re talking retirement, and saving for your child’s college fund–something that will take 5-10 years minimum to save for.

Once you have determined what that thing is that you are investing for, you will need to calculate how much money you will need to have in the “nest egg,” or the amount of money you will have by the time you reach your deadline.

2. Calculate how much money you need to have saved by the end of your investment period

With investing, this question can be a little more tricky to determine how much you need to save, because it typically deals with much larger numbers over a longer period of time than a simple savings plan.

Calculating how much money you need at the end of the investment period will ultimately be more of a guideline–something you are aiming to achieve within a certain time frame. For example, if you intend to retire with a $500,000 “nest egg” in savings by the age of 65…well, there are a lot of variables that can come in to play between now and then.

If you start investing for retirement at the age of 25, that gives you 40 years to figure out how much you need to save each year, and even each month to reach that goal. Then, once you factor in increases in income, changing jobs, separating or retiring from the military before the age of 65…there’s a lot to consider! There is a simpler plan for saving and investing for retirement.

The 15% Rule

This financial principle specifically addresses how much you need to save for retirement, and is by far the easiest to understand:

Save and invest 15% of your income toward retirement.

That’s it! The way we reached this percentage is simple. By saving and investing 15% of your income toward retirement, along with compound interest, you will have enough cash now to live your life (which is obviously important) and you will create a nest egg large enough, with time and compound interest on your side, that you will have enough money in retirement so that you do not need to touch the nest egg, and can live off of the returns each year from your investment.

Note: Saving and investing should be followed through as you would with any other goal. If you are investing for more than just retirement (like saving for your kid’s college fund), you should have a SMART goal in place.

3. Decide where you will place the money

Making the decision to invest and taking the first step toward investing can be incredibly intimidating…sometimes it’s downright scary.

You don’t have to be some sort of Wall Street Guru with friends in high places to tell you when and where to invest. It is true, it can be as simple or as complicated as you make it to be, but the process of investing shouldn’t deter you from actually investing and taking care of yourself and your family in the future.

As you would with a savings plan, once you have decided what you will invest for and have calculated how much you will need to save, you must decide where you will place the money.

What Are My Options For Investing?

The possibilities are virtually endless. For the sake of time, I will not get in to every single nook and cranny investment strategy you can take hold of in this article, but there will be many more articles to follow so you can gain a better in-depth understanding of what is out there for you.

Here, we will explore the best options that you can get started with right now.

1. Hire an investment professional
2. Contribute to your TSP or IRA
3. Manage your own investments through options such as USAA and Vanguard.

If you are interested in opening an investment account, these three options are all available to you as a military member (and civilians as well). The best option is to hire an investment professional to manage your investments. This is clearly the best choice for the obvious reason–they have extensive knowledge and education on what would be best to help keep you on track to reach your financial goals.

For military members, there is always the option for retirement savings to invest in the Thrift Savings Plan (TSP). This is something you can do simply by logging on to MyPay and allocating how much of your paycheck you would like to go into your TSP.

As you know, I recommend two things:

Invest in the ROTH TSP and save 15% of your paycheck toward retirement.

Finally, if you are looking to invest for more than just retirement, there are options to manage your own accounts, such as a 529 or ESA for education savings for your children’s college funds, or for opening a miscellaneous investment account that you can manage on your own through companies such as USAA or Vanguard.

Before You Begin… You Must Answer This Simple Question:

Also with investing, remember the why, as in “why am I investing this money” because this is the reason why you are working to achieve your financial goals in the first place. The why may be different for everyone, but it has to be something strong enough to get you through the tough times (ahem, COVID-19).

What’s Your Why?

As an example of a why, I’ll share my “why.” When I think of investing for my daughter’s college education, I picture her walking across the stage, as a second-generation college student, in her cap and gown, accepting her degree, knowing that she can start her life without student loan debt.

My retirement why is the conversations I have with my husband when we talk about what we will do when we retire from the military and from a potential “encore career” after this one. We discuss how we would love to buy a home in cash (another reason for our investing endeavor) and when we are retired, will have a day every week that we have a neighborhood party and grill for everyone there. Or how we will visit our children and grandchildren when we are retired and will travel the world.

Knowing your why is what will get you through the difficult times too. Make sure you create that crystal-clear picture in your mind.

That’s pretty much it! Again, the concept of saving and investing money is really simple. What gets most people caught up in this process is taking the first step to investing their money. By following through on this plan, and remembering the why, as in “why am I investing this money?” will help keep you on track to meeting your saving goals.

Final Thoughts

Investing money is the final process you should begin in order to achieve your long-term financial goals. Saving money is necessary to take care of your family in the immediate future; investing money takes care of you in the long-haul. The key to investing is to combine all of the financial principles we discussed in this series, to include making a budget, saving 15% of your income and investing that toward retirement, and even getting life insurance and making a will to ensure your money goes to the right people when it needs to.

Make the sacrifices you need to now to protect your family in the future.

As always, I am here as a resource to help guide; if you have questions, reach out! Comment on this page, or send me a message if you would like a personalized coaching plan on how to better allocate and track your money to reach your financial goals. Grab a cup of coffee, turn on your favorite playlist and get started!