Saving and investing are two ways to reach financial goals like a comfortable retirement or buying a house. Which of them would be better for you? It largely depends on your objectives, circumstances, and level of risk tolerance. In our today’s article called “Saving vs Investing”, we will compare both methods to help you make the right choice.
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What Is Saving
Most generally, saving is the money you put aside. This, you are going to use this money in the future, not immediately. Saving may be short-term (a down payment for an apartment) or long-term (retirement). Also, you can squirrel money away for a rainy day (an emergency fund).
For many people, saving is a good alternative to using credit. In this case, you delay the pleasure of having something but don’t pay any interest on the loan. Moreover, you earn some money by letting your savings sit in a bank account.
The choice between saving and using a credit largely depends on your psychological profile. For credit lovers, “immediate gratification” is essential, while savers enjoy holding and accumulating money.
Another alternative to saving is investing.
What Is Investing
Investing may look similar to saving, but there are some important differences between the two. On the most basic level, investing means using our resources to gain some benefits in the more or less distant future. It’s not only about money: for instance, you may invest 5 years of your life in a good education that will pay off after graduation.
In the financial context, investing is buying an asset (stocks, bonds, real estate, cryptocurrencies, etc.) in the hope to create wealth. Therefore, you invest your funds in something that has or promises the good potential for growth.
Normally, investing is less safe than saving, though a lot depends on what you save and what you invest in. Now, let’s explore each method in more detail.
Saving: Main Benefits
The first benefit of saving is that the number of monetary units you are holding won’t change over time. Say, if you have $10,000 in your savings account, this amount won’t get smaller unless you make withdrawals. For risk-averse people, it’s a huge advantage. It’s also good if your dream needs a certain amount of money to come true, and its price is unlikely to increase. Finally, saving is a good method for creating an emergency fund.
In summary, saving
- guarantees that putting aside a fixed amount of money every month will result in reaching your goal (like buying a car) on time;
- gives you more control over your funds (you are free to withdraw them if you want);
- allows you to earn some money due to a stable interest rate;
- is relatively low-risk, unless you live in an economically or politically unstable country;
- is hassle-free, as it’s rather easy to open a savings account.
Saving: Main Disadvantages
Speaking of disadvantages of saving, they are five:
- Inflation will decrease the value of your holdings over time, even if you deal with one of the major currencies (USD, EURO, GBP).
- Normally, the interest rate is not enough to fully compensate for the inflation.
- Saving means stable, but very low earnings, compared to what you could receive as an investor.
- If your country (and your currency) is unstable, you may lose your savings due to some monetary reform, or their value may decrease greatly overnight.
- The accessibility of funds has its downsides, especially if it’s difficult for you to resist temptation.
Investing: Main Advantages
Now, let’s consider the pros of investing.
- On the average, investing makes your money grow faster, compared to a savings account;
- You can benefit from the effect of compounding (“interest on interest”);
- Investing is a good option if your goal is rather distant (long-term).
Therefore, investing allows you to reach your goal without putting aside the same amount every month. If saving means that your money grows in a linear way, investing allows your earnings earn money, too.
Investing: Main Disadvantages
Higher potential returns go hand in hand with the following cons:
- Investing is less predictable, as market prices go up and down, especially if you deal with a volatile asset like cryptocurrencies.
- A price drop may happen at the moment when you planned to use this money. In this case, you have two options: to wait until it goes up again or accept the loss. If you have been investing to buy something, it can lead to postponing or editing your goal.
- Choosing the right asset requires some research, self-education, or professional advice. That is doubly true when you plan to invest in cryptos.
Besides, you may need some patience with innovative investments. The project you support may need a decade to grow up and start to pay-off. Sometimes, it never happens — the story of TON platform is fresh in our memory.
Saving or Investing: What to Choose
Choosing between these two options may be challenging. There are many factors to consider, but we can narrow it all down to four general rules.
Save, if you need to buy something by a certain (and not very distant) date. For example, if you plan to give your kid a car for his or her 18th birthday. Or if you need money for a wedding or a vacation that has already been scheduled.
For medium-term goals (with a time-span of 5-10 years), it may be safer to opt for saving, too. Generally, your choice between saving and investing depends on how much risk you are ready to take for getting bigger returns.
Invest, if you have a distant (long-term) goal. Some examples are retirement, buying a bigger house or some land, university education for your children, etc. Take advantage of the time you have to maximize your potential returns.
Good news for those who have both long- and short-term goals: you can always combine investing and saving. Invest for the goals that you can delay, and save for emergencies and the events with a fixed date.
Another smart trick is to start as an investor and then shift to saving. This shift will allow you to avoid negative price fluctuations and make sure your goal is reached on time.
Saving or Investing: Summary
Choosing between investing and saving is a serious decision that depends on how much time you have, your personal tolerance to risk, the importance of your goal, and your level of education. And, last but not least, your willingness to learn and try new things.