Many people often use the terms saving and investing interchangeably to refer to the same thing — saving money. Although they have some similarities, they mean two different things. Interestingly, they border on a crucial subject in our society. From time to time, we want to be sure that we have enough money to cater to our needs. This is why people stash money in bank accounts or look for investment opportunities to grow their money.
Savings are just as good as investments are, but deciding which is best for you depends on your financial goals over time. For instance, saving is best if you’re planning for your daughter’s wedding in two months. On the other hand, investing may be best if you have no immediate need for the money in your bank account.
Meaning of Saving and Investing
Among many differences, you’ll realize that savings are less risky than investing. While savings involves leaving your money in a savings account, investing is when you grow your money by putting it to use.
Savings is typically the money you leave in your account after you finish your expenses for the month. You may need the money immediately, but it is money that is available for easy access in the near future.
Investments are part of your income, which you invest in other financial products like mutual funds, fixed deposits, treasury bills, stocks, bonds, etc. The purpose of every investment is to grow your money. Investments can take up to about three years or more, which is why you should use the money you don’t need soon, or isn’t earmarked for some type of need. Unlike savings, investments take a more extended period and involve minimal to major risks.
Now that we understand the fundamental differences between savings and investments let’s take a closer look at the two.
Generally, most people believe that putting their money away in a bank savings account is not a very smart investment idea. This is because the money only sits there, earning very little interest. And if the rate of inflation should surge higher, your money may not gain in value. Therefore, it’s more rational to invest your money into investment strategies that promise a high ROI.
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Pros and Cons Of Savings and Investments
In deciding which of the two is better for you, you may want to consider each of their benefits and downsides. In this section, we look at why, when, and where savings and investments are most appropriate.
Pros of Savings
To begin with, your savings remain intact until you make withdrawals. Meanwhile, little interest accrues on the account. The main benefit of having your funds in your savings account is the ease of access to it in an emergency. Instead of reaching for a loan in such cases, you can easily help yourself by withdrawing.
Maintaining a savings account also enables you to make payments for necessities like cars, mortgages, and so on without hassles. Almost 70% of Americans save 10% or less of their income every month. Ideally, you should be saving 10-20% of your income, but you may need to save more if you’re saving towards a goal, say buying a car. These days, there are many online savings products that let you save without much effort.
Cons of Savings
Generally speaking, there really isn’t anything wrong with saving your money in a bank account. However, the never-ending impact of inflation could cause your money to lose some value.
This could be compensated for by the interest the account generates. But if you want more yield from your savings, you’ll need to deposit more money into the savings account.
Pros of Investing
Investments are forms of savings that allow you to make more money with your money. This sounds like owning or running a business, but it’s not. Basically, you invest your money into stocks, bonds, mutual funds, real estate, and alternative investments. Unlike savings, investments yield more interest or growth, but they take a longer time to mature.
This is ideal for medium and long-term financial goals, which may be done when you don’t have an immediate need for your money. For instance, investment is suitable if you want to start saving for your child’s college education six years before graduating from high school. The good thing about investing is that you can diversify — put your eggs in several baskets.
Cons of Investing
The major downside to investing is running the risk of losing your money due to a stock market crash, economic crisis, or real estate bubble. Following the wind of inflation, the prices of investment products could take a hit. As such, you may not be able to earn much until the prices improve. Therefore, it may take longer for you to reach your financial goal.
Also, you may find it difficult to access your funds when an unforeseen emergency arises. This is because investments are meant for the long-term.
Ideal Savings and Investment Products
You can leverage several savings account products to gradually grow your savings while also setting it aside for future needs. Some of these products include:
- Your bank savings account
- Certificate of Deposit
- Federal government savings bond
- Money market account, and
- Piggy banking.
These products are relatively easy to use. They all generate interest in the saved capital if left untouched for a reasonable length of time.
Investments, on the other hand, can be done through multiple channels as well. Examples include buying stocks, bonds, mutual funds, real estate, etc. However, you may need to discuss this with a stockbroker or financial advisor to help you make better investment decisions. These days, you can even have an app on your phone to keep an eye on your investments.
Wrapping Up
You can hardly go wrong by choosing either savings or investments. But, the choice of which to settle ultimately depends on your financial goals. If you want funds for projects in the nearest future, a short-term savings plan is best for you. However, if your goals are long-term in nature, then you’re better off investing your money until you need it. Either way, you may want to seek the advice of a banker or financial professional.
[Read Next: The Busy Person’s Guide to Investing]
Tycoono Media Inc. and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. You should consult your own tax, legal, financial and accounting advisors before engaging in any transaction. Please refer to our disclaimer for more information.
