Saving vs Investing: What is the Difference?
People are often confused with the difference between saving and investing, and if there even is a difference. Before we discuss the differences, any saving or investing in legitimate investments or savings structures are worth doing, and there is no right or wrong, there are simply good and better options to make your money work for you.
What is saving?
Saving is often confused with trying to create saving vs savings vehicles. In this post, I am going to focus on savings vehicles rather than the act of saving.
Saving simply means keeping money aside, for emergencies or for short term goals. Money in savings vehicles is often available immediately or with short notice. Savings typically accumulate in a linked savings account, money market accounts, and notice accounts.
“Tip: Leaving money in your cheque account often does not generate interest. If your bank offers you a no bank fees option if you leave a certain amount in your account, consider the interest you would forgo in a savings product vs the savings on your bank charges.
What is investing?
Investing typically consist of a portfolio with various asset classes. If your portfolio is constructed by a professional, these asset classes are often structured to reduce your volatility and increase the portfolio’s ability to deliver consistent results. The asset classes in a well-balanced portfolio will include money market instruments, bonds, listed property investment, onshore equity exposure and offshore exposure.
The level of exposure to the various asset classes will typically depend on the level of risk you are willing to take, considering how long you must achieve your goals and want to invest for.
Investing will help you grow your money more, however savings is vital to ensure stability of your financial management and to ensure that you have the ability to meet your short term goals.
When should I move my savings to investments?
That would depend on your personal circumstances. As a rule of thumb, you should have three months’ worth of expenses in savings. In South Africa, it takes roughly about six months to a year to find another job if you have been retrenched. Your retrenchment package might add to this pot of savings but depending on when you started it might not be sufficient to carry you for six months. If you are self-employed, or working on commission, the amount you need will vary from the normal three months. Therefore, moving your savings into investments, with longer term prospects should be a decision discussed with a professional financial planner.
The role of advice
A professional financial planner has the knowledge, skills and abilities to ensure that your investment and savings are balanced optimally and that you have invested in investments with the right amount of risk to ensure that you achieve the return needed for to meet your goals.
There are many options to do your investing yourself, but often the skills and expertise of a professional financial planner will ensure that your portfolio has the right return for your risk. They will also play a vital role in helping to control your emotions in big market turmoil’s.
You need both savings and investment options in your financial plan to stabilise your financial plan in the event of unforeseen circumstances and investments to help your money work for you. A professional financial advisor will play a vital role in the balance between saving and investing and will help you manage the behavioural impacts on your investments.