The difference between investing and saving

The difference between the terms saving and investing is often overlooked, with many people referring to their investments as savings and vice versa.  If you are interested in one of the two fields, you must first understand the differences that distinguish them.  Here's the difference between saving and investing and the relationship between them.

Let us first know what is saving and what is investment?

Saving is allocating a portion of money to be used for a future need or expense.  There are many savings options offered by various financial institutions such as savings in the bank, fixed deposits, etc.

Investment is the process of generating income or creating financial wealth through various investment methods such as stocks, mutual funds, real estate, bonds, ETFs, etc.  What creates the difference between saving and investing is the level of risk involved in the latter, it is important to remember that risk and return go hand in hand when it comes to investing.

Before defining the difference between investing and saving, let us first know the importance of each:

What is the importance of saving?

Emergencies: Savings are a must, regardless of their purpose.  You may pass through emergency circumstances without warning, such as losing your job, or you may suffer from a medical emergency in the family where you will need liquidity to return to.  So it is always advised to set aside at least 3 to 6 months of your income for emergencies.

The first step towards investing: You will have to allocate a portion of your saved money to invest it in order to create long-term wealth.[1]

What is the importance of investing?

Hedging against inflation: Inflation devours the value of money over time, which leads to a decrease in purchasing power.  The most effective way to secure your money is an investment that provides you with inflation-matching returns.

Achieving your financial goals: Whether your goal is to buy a house, a car, save for your marriage, pay for higher education or plan for your retirement, investing can help you achieve most of your financial goals.

Higher Returns: Investments such as mutual funds or stocks offer higher returns than fixed deposits or savings accounts.

The difference between investing and saving

investment

saving

Long-term capital increase or future wealth creation. Achieving short-term financial goals or covering unplanned expenses. Objective: Returns rise as the time period increases. Short term. Possibility to earn high returns. Small returns. Returns Investment does not provide automatic liquidity except in some  Cases such as liquid mutual funds.Liquidityinvolves some risks such as market volatility.Minimum risk.riskMutual funds, bonds, stocks, ETFs…certificates of deposit, savings accounts…options

Which is better?  Saving or investing?

Despite the difference between investing and saving, there is no better option than the other, it all depends on your financial situation, your goals and your willingness to take risks.  Saving may be the most appropriate option for you if you need money in the short term, but if you aim to develop your wealth in the long term, we advise you to invest.

When do you choose and how do you do it?

As mentioned earlier, there is a difference between saving and investing.  The first allows you to put your money in a safe place until it is used in an emergency, while the second offers you the possibility of earning high returns in the long term by buying assets that increase in value.

If you are confused about what step you might take, read this section of the article on the difference between investing and saving that will tell you when and how to choose between them[2].

When do you save?

Financial advisors advise having some money for emergencies, so saving may be an ideal option for you if you:

• No Contingency Savings: You should set aside at least one month of living expenses before diving into the world of investing.

• Need cash in five years or less: You may have set your sights on a down payment on a new home or car.  Either way, your money will stay in your savings account whenever you need it.

How to choose a good savings account

Every financial institution offers a savings account, but you should encourage one that:

• Gives a high annual return: electronic banks often pay rates that rise to 0.40% or 0.50%, unlike other banks that pay around 0.01%.

• Does not charge a monthly fee: Some banks waive the monthly fee if you have a large enough balance and you meet certain criteria.

It may be a good idea to have the bank of your choice soon have a branch and multiple customer service options such as live chat.  But when it comes to saving in general, earning interest should be your top priority.

When do you invest?

Experts advise investing if your financial goals are long-term, or if you:

• Have a full emergency fund: If you've met the six-month rule to save enough to cover six months of your needs after losing your job, for example, you can invest your remaining money.

• You have long-term goals: If your goals exceed the five-year barrier, such as retirement, you should think about investing from now.

How to choose a good brokerage account

We advise novice investors to use robo-advisors who use algorithms to manage your investments based on the level of risk you are willing to take.  You won't have to pay a lot to diversify your investments, the algorithms will take care of maintaining the right mix of assets for you.

If you prefer traditional brokerages, you can find those who offer similar services to robo-advisors which may be of interest to novice investors as well.  Find the company that allows you to open a free account and start your investment journey now.

Things will get easier when you find the right financial institution, as your money will start growing without you even having to move your finger.

Link