Many people face the financial dilemma of deciding between saving and investing. Both strategies are essential for building wealth, but they have distinct purposes and involve varying levels of risk and reward. In this blog, we’ll examine the significant differences between saving and investing which may assist you in determining the approach most suitable for your long-term financial goals.
Firstly, let’s start by breaking down the process of saving.
Sure, we know that saving is the process of setting aside money for future use, but It also involves putting money into a savings account, money market account, or another low-risk account that pays interest. Saving is often used for short-term goals, such as building an emergency fund or saving for the deposit on a house.
One of the primary benefits of saving is the safety of your money. When you deposit money into a savings account, your funds are typically insured by the government up to a certain amount. Whilst the interest rate on savings accounts is typically low, they offer a stable and predictable return which increases the more money you have in the account. This makes having a savings accounts a great option for those who want to protect their money and earn some interest in the process. Ultimately here, the key is to shop around with banks, finding financial institutions that offer higher interest rates on their savings accounts.
Investing, on the other hand, is the process of putting money into assets such as stocks, bonds, real estate or alternatives with the expectation of generating a return. When it comes to investing, the aim tends to be long-term goals, such as saving for retirement, earning a passive income, paying for a child’s education, or building wealth over time.
One of the primary benefits of investing is the potential for higher returns. Over time, investments have historically generated higher returns than savings accounts. However, investing also involves more risk than saving. Much like the old adage, no risk, no reward. This risk is due to the value of investments fluctuating which can sometimes result in the investor losing all their money. It’s important to note that investing is a long term strategy, diversifying your investment portfolio is crucial for minimising risk and investing should only be done with money a person can afford to lose.
This is where we come to the all-important question, should I invest or should I save?
This decision depends on two main factors, your financial goals and timeline. If you have short-term financial goals, such as saving for a holiday or building an emergency fund for a rainy day, then saving may be the best option. Savings accounts are low-risk and offer a predictable return, which makes them a great option for one’s short-term savings goals. Saving also has a lower financial risk in the short term and doesn’t come with the volatility of investing. Not to mention your savings are nestled safely in your bank account where amounts of up to $250K are insured. Keep in mind that there are of course cons when it comes to saving, such as your money losing value with inflation as the interest rates can’t keep up and purchasing power is worth less. Of course, it’s also much harder to build wealth in the long term compared to investing and yield changes on high-interest savings accounts means the rate of return can fluctuate.
Investing on the other hand has far greater potential for returns, which also means you don’t necessarily have to contribute as much money to reach your goals. What is great about investing is that you can contribute to the betterment of society by putting funds into companies and projects that your values align with. Investing can also result in a regular passive income, essentially making you money whilst you sleep. When it comes to investing, it’s important to remember that there will always be a higher financial risk and because of this volatility, the value of your investment may decline in the short term. Therefore, if you’re investing for a specific goal, you may have to wait longer to see the reward.
Therefore, consider this, if you have long-term financial goals, such as saving for retirement or building wealth over time, then investing may be a better option. While investments carry more risk than savings accounts, they also have the potential for higher returns. Over time, the power of compounding can help your investments grow significantly.
As mentioned earlier, the decision to save or invest depends on your individual financial situation and goals. A financial advisor can help you create a personalised plan that takes into account your risk tolerance, timeline, and financial goals. Whether you choose to save, invest, or a combination of both, the most important thing is to have a plan, stick to it and be willing to rise the highs and lows.
Disclaimer: This article is for informational purposes only and should not be considered as professional advice. The reader is advised to conduct their own research and seek independent advice from relevant professionals before making any decisions based on the information contained in this article.The information provided in this article is based on publicly available data and the opinions expressed are those of the author. The author shall not be held liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its use.