Why you should choose investments over savings
Saving is simply defined as income not spent or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recurring costs.
In terms of personal finance, saving generally specifies low-risk preservation of money, as in a deposit account, versus investment, wherein risk is a lot higher; in economics more broadly, it refers to any income not used for immediate consumption.
To invest is to distribute money in the expectation of some benefit in the future – for example, investment in durable goods, in real estate by the service industry, in factories for manufacturing, in product development, and in research and development. Investors generally expect higher returns from riskier investments. When we make a low-risk investment, the return is also generally low.
Some people confuse saving as investing because when you save you get interest on your savings but it is totally different from investing.
‘Investing’ is more than building rainy day savings.
Difference between saving and investing?
Saving – is putting money aside, bit by bit. You usually save up to pay for something specific, like a holiday, a deposit on a home, or to cover any emergencies that might crop up, like a broken boiler.
Saving usually means putting your money into cash products such as a savings account in a bank or building society.
A savings account is typically no-risk. You earn interest on the money you save; your initial capital is guaranteed and it’s more easily accessible if and when you need it. This type of account enables you to save money for a specific purpose, such as a dream holiday, within a short period of time.
Investing – is taking some of your money and trying to make it grow by buying things you think will increase in value. For example, you might invest in stocks, property, or shares in a fund.
Investments are aimed at wealth building. They involve greater risk, but also have the potential for higher returns than a regular savings account. Investing is the process of using your money to buy an asset that has a good probability of generating an acceptable rate of return over time, making you wealthier in the long term. It makes sense to have a well-diversified portfolio that helps spread your risk – as well as the potential to deliver returns – across a wide range of investment classes. Some examples include stocks, bonds, unit trusts and direct investment in property or other assets.
Whether or not it makes sense for you depends on your goals – specifically if they are long, short, or medium term.
- Short-term goals – are things you plan to do within the next five years.
- Medium-term goals – are things you plan to do within the next 5-10 years.
- Longer-term goals – are ones where you’re won’t need the money for ten years or more.
Investments are usually best for the medium term and long term goals as they yield high returns. One good investment can turn your life around positively.
Advantages of Investments over Savings
- Investment is a way of building a retirement fund: Investment is a better strategy for retirement funds. An investment could yield you over five (5) times of amount invested over a long period of time. For a comfortable retirement, investment in treasury bills, bonds, and stocks, etc. would be beneficial.
- Investment is a way of paying for your children’s education, such as high school or university costs. If you are a young bachelor, an investment would be a good way to prepare for your children’s future. Invested funds would bring in greater returns over time which could be channeled into the education of your children.
- Building future wealth: To attain financial independence, you need to get to a point where your money begins to work for you. Even while sleeping, wealth is being acquired. Investment is a way of achieving this. While there are risks involved, there are also great rewards. Rich people do not depend on just savings, they understand that it is important to take risks and that high risks produce high rewards.
- Interest rates on savings accounts are lower than on more high-risk investments.
- Saving takes a lot of discipline and commitment. Easy access to your funds may lead to spending your savings on impulse buys. With longer-term investments such as unit trusts or a retirement annuity, you do not have easy access to your money.
- Beat inflation: Inflation is the ongoing rise in the cost of living over time, and it can impact on our financial wellbeing. One way to help outpace inflation – and generate positive ‘real’ returns over the longer term – is by investing in assets that are not just capable of delivering higher income returns but also offer the potential for capital growth.
- The investment allows you to make decisions regarding how to allocate your funds based on your appetite for risk, and your investment criteria.
Consider this example…
If you deposited $2,000 in a dollar savings account at 3 percent annual interest, it would grow to $3,612 in 20 years. The same $2,000 invested in a stock mutual fund earning an average 10 percent a year would grow to $13,455 in 20 years.
A very important aspect of investing, which differentiates investment from speculation or gambling, is that the investor can reasonably anticipate making a profit on their investment due to their advance research and prudent selection of an appropriate investment vehicle.
Basically, they are not out placing bets in the markets, but they are instead of expecting profit to result from their research and investment activities.