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I once saw a bit of graffiti written on a wall that said “Jesus Saves.” Underneath it, some wag had scrawled “Moses Invests.”

What is saving? What is investing? Saving is when you spend less than you earn. Investing is how you take your savings and grow it. Saving and Investment go hand-in-hand. Without saving, there can be no investing. So the first step is to save.

Saving Equals Income Minus Spending
Look at your monthly income. Let’s say it’s $3000 per month. Next add up your monthly expenses–how much you spend. Suppose you spent $3300 last month. Oops! You are consuming more than your income. This is a recipe for disaster and misery.

You must come up with a budget. Divide your monthly expenses into two categories: discretionary and non-discretionary. Non-discretionary expenses are thing like your rent, utilities, meals and wheels. Discretionary spending is all the money that you spend on non-essential things: movies, alcohol, vacations.

The minimum target for savings is 10% of your income. 20% is better, but let’s start with 10%. If you earn $3000 per month and you want to save $300 per month, start cutting until your expenses are down to $2700 per month. The place to cut is the discretionary spending.

What if you honestly have no discretionary spending to cut? This makes saving a lot more difficult. You’ll have to increase your monthly income, either by working more hours or by getting a higher paying job. Not so easy.

Grow Your Money by Investing
What is investing? Investing is taking what you have saved and putting it to use so that it will grow.

Companies that want to expand their business need money to do it. Maybe they want to build a new factory or they need to buy new machine tools. If you saved up $10,000, you can lend it to one of those companies for a couple of years and they will pay you interest for the use of your money. This is called a bond which is a kind of loan.

Or maybe an engineer has invented a new product that will revolutionize transportation. He needs funds to start up a new firm to manufacture his invention. If you have $10,000 saved up, you can become a part owner in the new venture by buying shares of stock. If the company is profitable, as an owner you are entitled to a share of the profits. This is called equity, which means ownership.

How Does Your Money Grow?
So how does your money grow through investing? Suppose you lend $10,000 to a company for one year and they agree to pay you 5% interest or $500 each year. At the end of the year they give you back your $10,000 principle plus $500 interest. Now you have $10,500 to invest. You money has grown by 5%. If you can do this every year for about 14 years, your money will double. That’s what investing is all about.

A similar thing can happen with stock ownership, although it is more complicated and the growth is less reliable. Suppose you take your $10,000 savings and buy 100 shares of stock for $100 per share. Suppose further that each share of stock pays $5 in dividends annually, So you 100 shares will pay $500 in annual dividends. If, at the end of the year, you receive the dividend and if you can cash in your shares at $100, your money will grow just like it does with a bond.

The only catch with stock investing is that neither the dividend nor the share price is guaranteed. The company may decide that it can’t afford to pay a dividend this year. They can cut or eliminate the dividend anytime at their discretion. Even worse, the share price, which is determine in the stock market, rises and falls every day. At the end of the year the shares you paid $100 for may only be worth $50. This is not unusual. It is very common.

For this reason, stocks are considered to be more risky than bonds. Bond issuers are required by contract to make interest payments and to return all of your principle at the end of the term. Only by declaring bankruptcy can companies avoid paying on their bonds. This makes it difficult for companies to stiff you.

But there is no similar requirement with stock dividends. A company may decide they need the cash for some reason and cancel dividend payments you were counting on. There is nothing you can do about it except sell the stock which will probably be at a huge loss. In the long run, stocks may pay out everything you expected, but in the short run they can come up short. Sometimes you might have to wait 5, 10 or even 20 years to get all your money back. That is why most people consider stocks to be a long term investment. When you buy a stock there is a great risk of losing money.

Summary: Invest with Stocks & Bonds
Lending money to companies (bonds) or becoming a part owner of a company (stock or equity) are two ways to invest your savings so that it grows over time. Your money can grow because bonds pay interest and stocks pay dividends.

Here are some books to get you started with a plan for saving and investing. The Dummies books contain information for beginning investors. Suze Orman’s books can help you get out of debt and on the road to saving.