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Because they both involve setting money aside for future use, people sometimes use the terms saving and investing interchangeably. However, they are different things. While saving is the first step in achieving financial stability, it has its limitations, and typically, it won’t lead to wealth creation.
Saving provides a safety net for emergencies, keeps you afloat in the face of reduced or lost income, helps you to achieve your goals, and acts as a cushion against rising prices. However, it has its limitations.
The most significant drawback of focusing only on saving is that traditional savings accounts offer very low interest rates that generally don’t outpace inflation.
Let’s say you had $1,000 in a savings account that pays 0.2 percent interest per year. After five years, you would have $1,010. You’d have more money than you started with, but when you factor in how much the cost of living has gone up, you’d realise that you can’t buy as much with that $1,010 as you could have with the original amount five years ago. What you have now is worth less than what you started out with.
So, while it’s important to have savings for all the reasons we mentioned above, if you’re able to, you should make investing a part of your financial strategy.
Investing involves allocating money into various assets such as bonds, stocks, mutual funds, and other vehicles with the expectation of generating a return. There are several benefits to this.
Remember we mentioned inflation eroding your purchasing power? Well, investing can help you to beat inflation. That’s because investment vehicles typically offer higher returns than saving, so your money grows faster than the rate of inflation, thereby increasing your purchasing power.
Over time, investing can help you to build wealth and enable you to reach your long-term financial goals, be they funding your children’s education or having a sustainable retirement plan.
This is particularly true if the investments allow you to benefit from compound interest. With compound interest, you earn returns on both your initial investment and the interest that is accumulated over time. In the long term, this can significantly increase your wealth.
So how do you know when you should start thinking about investing?
According to chartered accountant and auditor Lydia McCollin, you should definitely consider investing if you have already saved six to nine months’ worth of expenses and you’re not paying down debt.
In such a situation, you are saving more than you need and missing out on good investment opportunities. If you’d prefer to have quick access to cash, you could place your excess savings in more liquid investments like certain Government securities such as BOSS+ bonds and treasury bills, or with certain deposit facilities at financial institutions.
If you don’t think you’ll need quick access to your money, you can consider mutual funds or other long-term investments.
Making your first investment can seem daunting, but it doesn't have to be. Before you part with your money, you should:
To be clear, we’re not knocking saving. Saving is essential, but for long-term financial growth and to create wealth, investing is also important. When you invest, not only do you protect your money from inflation, but you can also achieve your financial goals much more quickly. So, consider starting your investment journey.
Visit our MoneySmart hub for more articles, videos, and tips on how to secure your finances. Have a specific question you’d like answered? Submit it and it could be answered in our Ask the Expert column.