One of the key questions people often ask is, “Should I be saving or investing my money?” The answer is not always clear cut and there are pros and cons to both. In this post, we’ll explore the difference between savings and investment that will help you determine which approach is right for you.
Savings
Savings refer to the amount of money you put aside for future use. It’s a safe and low-risk way to store your money and access it when you need it. The primary goal of savings is to preserve your capital and provide a cushion in case of emergencies.
Naturally, the best place to save your money is in a savings account. However, due to the notoriously low-interest rates offered by commercial banks, one would think otherwise. The good thing is, with the advent of digital banks, you can get higher interest rates to the tune of 4-6% per annum. In case you missed it, I had an earlier discussion about high-yield saving accounts.
Investment
Contrarily, investing entails making your money work for you. It’s a strategy to gradually increase your riches. Investments have dangers, as opposed to savings. Even though you could lose all or a portion of your investment, with proper management, investments can offer a longer-term return than savings. There are several sorts of investments, including stocks, bonds, mutual funds, real estate, and more.
Difference between Savings and Investment
The main difference between savings and investment is the purpose and risk involved. Savings is for safety and stability, while investment is for growth and potential return. Savings accounts are insured by the government (PDIC), while investments are not. Savings account interest rates are often lower than investment returns, but there is also significantly less chance of losing money.
Which one is right for you?
There’s no right or wrong answer to this. It all depends on your time horizon, level of risk tolerance, and financial goal. Opt for savings if you want a low-risk method to keep your money safe and accessible. Investments, on the other hand, would be a good choice if you’re willing to accept some risk in exchange for the chance of a higher return.
It’s crucial to actually balance your savings and investments. While investments are best suited for longer-term goals like retirement, savings can be used for urgent needs and crises. Ensure that you educate yourself on the risks involved in the various investment possibilities.
Conclusion
Saving and investing are two different ways you might manage your finances. By understanding the distinctions between the two and choosing the best plan for your financial goals, you can make sensible financial decisions. It’s essential to keep a balance between investments and savings and to educate yourself about the numerous options accessible.