Saving Versus Investing

Saving and investing are related but independent approaches that enable you to secure your financial future. Although both are crucial for success, some people fail to balance them appropriately.

Saving

Saving is a conservative approach to growing wealth or building a nest egg. In essence it amounts to taking cash and keeping it in a safe and liquid account or security. While the interest paid on savings is relatively low, you have very little chance of losing money. GICs are a great example of a low risk but low interest investment option.

Investing

Put simply, investing usually refers to the process of using cash to purchase an asset that you believe will create a safe and acceptable return over time.

An investment can be as simple as investing in individual stocks and bonds, or buying groups of pre-selected stocks or bonds through mutual funds or exchange-traded funds. Mutual funds and exchange-traded funds are often used by investors who don’t have a strong understanding of the markets, since a more savvy investor oversees the management of assets.

Even with a savvy investor, investments are hit or miss, and often take time and a lot of effort to bear fruit. While the market generally goes up over time it can decline for long periods of time before reaching new highs. As a result, investing is almost always a more uncertain, yet often more rewarding way of growing your wealth.

Saving Versus Investing: Finding the Balance

Saving, no matter how conservative you think it is, must always come first as it is the building block of your future investments. Unless you inherit a large sum of money, you will probably draw money from your savings account as capital at some point in your life.

As a rule of thumb, the savings you have must cover all of your expenses like utility bills, food, clothes, insurance, loan payments and other similar costs for at least six months. With a substantial savings account, it will give you enough time to adjust your lifestyle if you lose your job. You do not want to be the person who lives from paycheque to paycheque.

Another thing to remember is that anything in your life that may need a large amount of money in five years or less must be savings-driven. Investments in stocks in the short-term are volatile as it may lose more than half its value within a year.

Saving will give you accessible cash in times of emergencies or, when you want to buy something. It also entails minimal risk as you leave it in a bank to gain interest. Investments involve a lot of risk and uncertainty, along with harder to access cash. However, an investment has a higher potential for profit compared to saving.

You will need to strike a balance between the two to secure your future and stay financially stable and debt-free.