You’ve got some extra cash on the side and you don’t want to spend it on clothes or dining. What to do in such an unusual situation? The idea that most commonly pops up when you find yourself staring at your spare cash is to start saving. Another common thought –especially popular with Millennials and people with entrepreneur type of spirit – is to invest the money. This leads us to the famous financial dilemma – investing vs. saving.
Instead of juggling these options until you go out and spend the money, let’s dissect both concepts. When you understand better how these financial strategies differ, you’ll be able to develop a plan.
Keep in mind that one doesn’t exclude the other. You can do a little bit of both but still, you need a proper foundation consisted of valid information.
What we’ll uncover in the following lines is:
- What is saving and reasons to save;
- What is investing and reasons to invest; and
- Key differences between saving and investing.
Once you have all of this cleared out you will be able to improve your judgement. Educating yourself and assessing possibilities with an open mind is what leads to smart decisions.
Without further ado, it’s time to address the investing vs. saving battle.
Saving – Everything that Comes with It
Simply put, saving is putting your money aside. Usually, funds directed to saving are placed in a bank account.
People typically save for a certain goal. Thus, saving can be short-term or long-term.
For example, short-term saving can refer to saving money for 3 months to go on a summer holiday. A long-term savings plan can be saving for several years to purchase a car.
Saving has a relatively low return as the interest rates are pretty modest. You can go out digging for the highest interest rate savings account if you want your savings to grow without your contribution.
When should I save, you ask?
Well, having an emergency savings fund is always a good idea. You never know what can come up (let’s just remember the COVID-19) and having some spare cash to cover your three months’ rent or broken oven will come in handy.
Another good reason to opt for saving is getting yourself something you set your eyes on – whether that’s a condo in the centre of the city, a new Ford Fiesta, or a designer bag. Instead of burying yourself in credit card debt, you can make a smart decision and save away until you reach your goal.
What you should have in mind when it comes to saving is that your stored cash can’t run away from inflation. Your money’s purchasing power can lower, so you’ll be able to buy less for the same amount of money.
Investing – and Everything that Comes with It
Investing is also a form of setting your money aside for the future. However, it is a more intrinsic and strategic process. With investing you’ll get a chance to notably increase your initial capital. But to do that, you need to plan and research.
To understand investing better, let’s cover some popular types of investments:
- Stocks and shares
- Savings bonds
- Certificates of deposit
- ETF (Exchange-Traded Funds)
- REIT (Real Estate Investment Trust)
- Unit trusts
Investing is a great business opportunity that can make you money over time. Especially if you opt for passive investing. You put the money in the investment of your choice and let the magical world of investing do its thing. Fast forward 5 years later, and you get yourself a decent pile of money.
The con of investing is that if you need the money ASAP but the investment price went down, you could find yourself in a tricky situation. Depending on the drop, you can lose money if you pull out too early.
There is also the fact that nothing can guarantee you returns. For investments to truly pay off, you need to wait as long as you can. A person that lacks patience might not want to commit to investing.
Saving vs. Investing – The Key Differences
The first difference that you might have noticed is the variation in simplicity.
If you want to invest you need to get invested (pun intended). You need to keep up with the market, research the companies and investing opportunities, and potentially, hire an expert such as a regulated independent financial adviser. With savings, you just give your money to the bank. That’s it.
What goes in favour of investing is that you won’t need to put aside your money monthly to reach your set goal. Typically, if you want to grow your savings to a certain amount, you divide that amount with the funds you can spare every month. Savings demand dedication and regular contribution.
On the other hand, you can invest when the right opportunity arises. Investing doesn’t require giving up money monthly if you want to reach your goal (although it helps!).
With passive investing, you can even invest in Mutual Funds, for example, and go on with your life, spending your salary as you used to. In 5 years or more, you’ll get yourself a decent return.
Time-wise, with savings you can cover your short-term goals while if you want your investments to earn money, you need to wait.
To Invest or To Save – What’s the Right Choice for You?
There is no simple “do this” or “do that” answer. Both options are valid and both can be a wise financial decision.
To answer this question, you should consider your goals. What do you want to achieve?
If you want to buy a car, pay off a debt, have an emergency fund, or put aside money for your sister’s wedding, you should opt for saving.
The situations where investing is a better choice are when you want to start your own business in the future, have a decent retirement fund, or open up your B&B in 10 years.
Overall, you need to define what you want and that will clarify what kind of financial strategy will get you there.
There is also the fact that one doesn’t exclude the other. You can both save and invest if you have multiple goals and you are ready to go all in to turn them into a reality.