Often confused as the same, saving and investment have differences and one must acknowledge them, and learn about both to be financially successful in life.
Investing VS Saving
If not spent, the money owned is either saved or invested. Saving is keeping it in cash or liquid form for current, emergency, or near-future requirements. Investing is buying assets or securities from cash and expecting appreciation in value or additional income. In some cases, investments can appreciate the value and produce income at the same time. It is important to save in order to invest but saving without investing won’t be a smart decision due to inflation. If the average CPI inflation rate in South Africa is 4% then R100,000 saved in cash will be equivalent to R96,000 one year later. If the investment tool is liquid, i.e., allows an easy asset to cash conversion, it can be considered saving as well. However, investments in volatile markets cannot be regarded as savings as their value can be lower at times while liquidity is low.
Should I Save or Invest?
Saving and investment, both are equally essential components of life. Your financial stability is much likely to tumble if you fall short of any. The ideal ratio of saving to investment can be different for each individual as it depends on the expenses and financial goals. Those who earn a little over their monthly expense must allocate a smaller proportion to investments. The investment allocation can be increased by decreasing the expenses and spending. Pros of Saving- You will have funds for emergency needs
- Cash availability for spending, paying bills, fees, etc.
- Capital market trends won’t affect your savings
- The saved money will allow you to invest more
- You will miss out the money-making opportunities in the capital markets
- Negative net returns on Cash due to inflation
- The returns can be much higher than the inflation rate
- Long term financial goals can be achieved with disciplined investment
- Investing will enhance your financial situation
- The invested amount will be at risk of capital market
- The invested amount won’t be available to spend
- No funds will be available for current and emergency needs
When should you Save?
Investing every penny that you don’t spend may enhance your financial conditions in the future but can add consequences in present. Saving is necessary and its importance depends on your expenses, goals, necessities, and financial condition.- Emergency Needs: Every individual must maintain emergency funds. It is generally advised to maintain savings for the living expenses of three months.
- Short-term Goals: If you wish to achieve a financial goal in less than 3 years, you need to further increase your savings. Investment for short tenures is not advisable due to potential for higher risks & fluctuations in value.
- Independence and Security: It is always good to have someone that supports you financially. May it be family, friends, job, business, etc. If nothing is saved, you will always be dependent on that source of income. Savings will make you financially independent and will reduce financial stress for emergency needs.
When should you Invest?
If you do not invest the saved amount, you will never be able to maintain or increase its value. Apart from gaining capital appreciation, you can also earn a regular income or dividend from the invested capital.- Long Term Goal: You should invest only when your threshold for the investment tenure is more than 3 years. For any investment of lesser tenure, the capital market must be of very low risk and high liquidity.
- Invest when you can: Investing too much in a volatile market can invite unwanted consequences. Investing without saving will force you to sell the assets at current prices which can be lower.
- Educate Yourself: Investment should only be done after you are familiar with every aspect of the capital market. Investing in an unknown instrument is never a good idea as you may not reach your goal.
