There’s no universal answer to the ‘save or invest’ question. What you need, when you need it, and how much you can afford to contribute all factor into the equation.
Saving and investing are both important and can help you achieve a more comfortable financial future. But do you really know the difference?
When comparing the choices, one of the biggest differences is a risk versus a reward.
Saving will typically give you a lower return, with virtually no risk. Investing however, will give you a higher return, but with the added risk of potential loss.
Generally, people save money to cover unexpected expenses or urgent money requirements. Choosing to save usually means you want the cash to be available quickly, should the need arise. Saving doesn’t have the same level of risk as investing, but the financial returns are usually lower as well.
Investing isn’t really that different to saving in that you’re putting away money for the future. Where it differs is that investments are normally made to generate returns over a longer period, seek higher returns and in doing so take more risk.
Even though saving and investing have different features, they do share one common goal: they’re both strategies to accumulate money.
On the plus side, bank products such as savings accounts tell you upfront how much the account is paying, even if that amount varies. While the returns are lower, you’re not likely to lose any money, and they’re generally very liquid, meaning you can get your money when you need it. It’s straight-forward, easy to do and without a lot of costs.
However, saving does have some drawbacks.
Returns are low, meaning you could earn more by investing (but there’s no guarantee you will) and because returns are low, you may lose purchasing power over time, as inflation eats away at your money.
The benefits of investing include much higher returns, but you won’t know how much you’ll gain or lose in any given time period.
All investments can be classified as short, medium or long-term. Term refers to the length of time you’ll need to wait before you receive some form of return. Think about how much you can afford to invest and for how long. Some investment products can be very liquid, meaning they can be ‘cashed-in’ more easily. However, this does not guarantee you’ll get back the money you put into them.
The economy, compounding, taxation and inflation are all factors that can affect your investments. It pays to do your research, stay informed and speak to an expert such as a financial planner.
While there’s the potential for higher returns, investing has quite a few drawbacks.
First of all, returns are not guaranteed, and there’s a good chance you’ll lose money, at least in the short term, as the value of your assets go up and down depending on many market forces that are out of your control.
When planning your investments you’ll need to look where you’re investing and also for how long. Taking money out of investments at the wrong time can have significant financial impacts, and avoiding this may mean not accessing your money until planned. Because investing can be complex, you should seek professional advice before doing so.
Neither saving or investing will cover all of your circumstances, all of the time, and the right choice really depends on your current financial position.
If you need the money soon or for an emergency fund, saving is probably a better option. If you don’t need the money for at least three years or more, it may be better to invest.
There’s a lot to think about when it comes to saving versus investing. For more information, head to our online e-learning modules at eisuper.com.au/MoneyMatters and take a look through our investing section today.
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