Last Updated on October 18, 2022
Saving and investing are vital concepts for establishing a solid financial foundation, but they are not interchangeable. While both can help you attain a more secure financial future, consumers must understand the distinctions and when it is better to save versus invest.
Saving and investing have one thing in common: they are both extremely important in our lives. If you aren’t already doing either, now is the time to start. This may necessitate adjustments to your spending, tracking, and income use, but it is something that can and should be factored into your strategy. Saving should be done on a short-term basis while investing should be done on a long-term basis.
Both savers and investors recognize the value of having money set aside. Before committing a substantial sum of money to long-term investments, investors should ensure that they have sufficient funds in their bank account to handle emergency needs and other unexpected charges.
The Difference Between Saving and Investing
Saving is the process of putting money aside over time, usually in a bank account. People typically set aside money for a specific purpose, such as purchasing a car, making a down payment on a home, or dealing with any unexpected expenses. Saving money usually means that it will be there when we need it and will not depreciate in value. It’s critical to keep track of your savings, assign a deadline, or schedule, and a monetary value to your objectives.
For example, if you want to buy a new iPhone by December, you may set a goal of saving somewhere between N200,000 and N350,000 in eight months to withdraw at the end of the year. You need to know how much you’ll need, how much you should save each month, and whether you’ll still have enough money to manage the phone after spending all that money buying it i.e. buying data, a screen guard, a phone case and so on.
Investing, on the other hand, is something that needs to be done with wisdom and utmost intentionality. It entails investing a portion of your money to help it grow by purchasing assets that may appreciate in value, such as stocks, real estate, or mutual fund shares.
You’re exposed to a different kind of risk and market exposure here. This means that the value of your investment can and will fluctuate, and you may receive less than you invested. Expected returns are likewise subject to change and are not guaranteed.
Key Differences: Saving vs Investing
Risk
To begin, the most significant and fundamental distinction between saving and investing is the amount of risk involved. When you put money into a savings account, the risk of losing money is quite low when compared to other investments, and your savings are also entitled to interest, so your money is pretty much safe.
Investing media may carry the risk of prospective returns based on the investment term or market conditions. Investing in the stock market entails a certain amount of risk. If one does not invest in excellent equities with long-term growth potential, one may lose money. As a result, it’s a good idea to hire a professional financial counsellor. Investing risk varies depending on the investment channels.
Short-term ups and downs should not influence your attitude on good quality companies with long-term views if your money is invested in them. The program information provided by the mutual fund indicates the potential risk involved. In the long run, intelligent investing may produce significantly better returns than savings.
Risk is a constant in the world of investing. you can try spreading your money across several sorts of investments to help you reduce the amount of risk you accept while investing. This is called ‘Diversification’.
Returns
The purpose of investing is to make money, whereas the goal of saving is to keep our money secure while earning relatively little. If you maintain your money in a bank fixed deposit, you may expect to earn interest of around 8-9% on average. Savings account interest is frequently substantially lower. However, investments in equity-based mutual fund schemes have a far larger long-term value growth potential. When evaluated over a lengthy period of time, such as 5-10 years, quality investments have a higher potential return than ordinary savings.
Period
Savings are often used to meet small financial goals over a short period of time, such as 1-3 years. If you want to buy a new phone or take a short domestic vacation in the near future, saving might be an excellent way to achieve your goals.
Investing, on the other hand, is often a long-term strategy for achieving larger financial objectives. Let’s say you’re saving for your child’s school, wedding, or a nice retirement life, all of which are due in 5 or more years from now. Investing now can help you achieve these goals when you need them.
You might want to explore investing for longer-term goals. This is because, over the medium and long term, inflation can have a significant impact on the value of cash savings. Long-term, stock-market-based investments outperform cash, allowing for higher returns on any money invested over time.
Access to money
Money savings can come in helpful when you’re in a pinch. You have complete control over your money in savings. You can take a portion of your savings or the entire amount as you desire, but you may find yourself spending money that is readily available.
When it comes to investing, your ability to access your money is determined by the type of investment you make. You can redeem your assets in open-ended equity mutual funds at any time. The capital gain is tax-free if the investment duration in an equity mutual fund scheme is more than one year.
Final Thoughts
It is important to note that saving and investing both have perks. If you are trying to significantly grow your wealth over time, investments are the way to go but you really can’t throw all your money into investments without having some savings. What would you then do if emergency funds come up? Imagine having all your funds tied up in investments and not having enough money to change your phone when it accidentally smashes against the concrete sidewalk on your morning jog or to take your daughter to the hospital if she suddenly falls ill. The bottom line is They both have equal importance and it would be best to do both so your financial future can be secured and your present needs can be met as well.
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