Africa-Press – Eswatini. Saving and investing are both important concepts for building a sound financial foundation, but they’re not the same thing. While both can help you achieve a more comfortable financial future, consumers need to know the differences and when it’s best to save compared to when it’s best to invest.
Having extra money is always a good thing – whether you need it for your child’s education, for your retirement or to have money when you go on holiday.
But while they’re both good to do, saving and investing are two different things. Saving is usually done to create assets with a specific goal in mind, such as saving for a holiday or having money for emergencies.
Investing, on the other hand, is about growing assets that you already have, which means managing your existing wealth in the longer term.
Here are some other key differences between the two:
1. Length of time
When you save, you usually do so for a relatively short amount of time, and for a specific goal that’s not too far in the future – such as going on holiday at the end of the year, or having money available for emergencies. In contrast, investing can help you reach bigger long-term goals like paying for your child’s education or saving for your retirement. For this reason, you’d typically invest for a longer period of time, whether it’s ten years, twenty years or more.
2. Access to your money
When you save money in a bank account, you can usually access the cash relatively quickly if you need it. When you invest your money, you’re intending to put it away for a longer period of time, so it can be harder to access it quickly (or you may have to pay a fee to do so), depending on the type of investment policy you take.
3. Amount of risk
If your money is in a savings account, there’s very little risk of anything happening to it. But then it also won’t grow by a huge amount. In contrast, if you invest your money, there’s a bigger chance you’ll make more on that investment or lose money on it, depending on what the market does.
If you’re willing to wait out tough market conditions, and leave your investments intact, the lows and highs should even out.
4. Return on your money – also known as growth
Although you’ll earn some interest on money in a savings account, this amount will generally be lower than the return you’ll make on an investment over a longer time period. This is partly because your investment is exposed to growth potential and should increase over time. This means the overall amount could be worth more than keeping a set amount of money in the bank and earning interest.
The pros and cons of saving
There are plenty of reasons you should save your hard-earned money. For one, it’s usually your safest bet, and it’s the best way to avoid losing any cash along the way. It’s also easy to do, and you can access the funds quickly when you need them.
All in all, saving comes with these benefits:
• Savings accounts tell you upfront how much interest you’ll earn on your balance.
• Bank products are generally very liquid, meaning you can get your money as soon as you need it.
• There are minimal fees.
• Saving is generally straightforward and easy to do. There usually isn’t any upfront cost or learning curve.
Despite its perks, saving does have some drawbacks, including:
• Returns are low, meaning you could earn more by investing.
• Because returns are low, you may lose purchasing power over time, as inflation eats away at your money.
The pros and cons of investing
Saving is definitely safer than investing, though it will likely not result in the most wealth accumulated over the long run.
Here are just a few of the benefits that investing your cash comes with:
• Investing products such as stocks can have much higher returns than savings accounts.
• Investing products are generally very liquid. Stocks, bonds and ETFs can easily be converted into cash on almost any weekday.
• If you own a broadly diversified collection of stocks, then you’re likely to easily beat inflation over long periods of time and increase your purchasing power.
While there’s the potential for higher returns, investing has quite a few drawbacks, including:
• Returns are not guaranteed, and there’s a good chance you will lose money at least in the short term as the value of your assets fluctuates.
• Depending on when you sell and the health of the overall economy, you may not get back what you initially invested.
• You’ll want to let your money stay in an investment account for at least five years, so that you can hopefully ride out any short-term downdrafts. In general, you’ll want to hold your investments as long as possible — and that means not accessing them.
• Because investing can be complex, you’ll probably need some expert help doing it — unless you have the time and skillset to teach yourself how.
• Fees can be higher in brokerage accounts. You may have to pay to trade a stock or fund.
So which is better – saving or investing?
Neither saving or investing is better in all circumstances, and the right choice really depends on your current financial position.
When to save money
• If you’ll need the money in the next few years, a high-yield savings account or money-market fund will likely be best for you.
• If you haven’t built up an emergency fund yet, you’ll want to do that before you dive into investing. Most experts suggest having three to six months worth of expenses set aside in an emergency fund.
• If you’re carrying high-interest debt such as a credit card balance, it’s best to work toward paying it down before investing. Paying off a loan with an annual interest rate in the high-teens will likely give you a better return than you can earn investing.
When to invest money
• If you don’t need the money for at least five years and you’re comfortable taking some risk, investing the funds will likely yield higher returns than saving.
If you have built up your emergency fund and don’t carry any high-interest debt, investing your extra money can help you grow your wealth over time. Investing is crucial if you’re going to achieve long-term goals like retirement.
Both saving and investing are important when it comes to having a firm financial plan in place. But they’re different tools, used for different time periods and different goals.
Learn more about financial matters in a fun, informative way through the Old Mutual team. Contact [email protected] to book your personal financial training at no cost to you!
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