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
Cons of Saving
- You will miss out the money-making opportunities in the capital markets
- Negative net returns on Cash due to inflation
Pros of Investing
- 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
Cons of Investing
- 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
It can be observed that saving as well as investing has multiple pros and cons. Without a proper balancing between the two, you are destined to face consequences.
There is no fixed guideline or a ratio that you should maintain for savings and investment. Considering certain factors regarding saving and investment can enhance your financial stability.
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.
Investments can simplify the path to achieve burdening financial goals like retirement planning, child planning, buying a house, car, etc.
- 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.
You should only invest when you have saved emergency funds and won’t be needing to withdraw from your investments untimely. Your bills should be paid off before investing and no debt or financial obligation should interrupt your investment plan.
- 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.
Rahul Sharma from Forex Trading Education & comparison portal Forex Brokers advises that you must not confuse online trading with investing. For example, CFD Trading & Crypto trading are risky instruments & should only be considered by professional traders, and even in that case, only a very small percentage of your portfolio should consist of risky instruments.
The investment tenure, risk factor, and other factors of investment must be in accordance with the investment objective.
How to Invest in South Africa?
In South Africa, Investments can be done in JSE stocks, foreign stocks, bonds, indices, real estate, cryptocurrencies, etc. Each instrument has its own risk levels.
Stocks and ETFs on the Johannesburg Stock Exchange (JSE) can only be traded through a JSE licensed broker. These brokers charge brokerage fees ranging from 0.2% to 1.5% of the investment amount apart from the monthly administrative fee.
Some brokers like Easy Equities allow foreign stock investing on New York Stock Exchange (NYSE) at low rates.
By investing in the stocks on JSE and NYSE in South Africa, investors can earn more than 10% annual return above inflation, according to the returns on average in the last 10 years. Entirely depending on market trends, the risk factor is also high. These are considered ideal for an investment tenure of more than 5 years.
Bonds can be bought through the official websites of RSA Retail Bonds. Multiple platforms are available in South Africa for investment in cryptocurrencies and other capital markets as well.
Before directly jumping off to investments, it is better to make a stable financial plan considering the debts, risk threshold and expenses.
Neither savings nor investing can be ignored if you wish to have a financially stable and secured present and future.