Money matters can be confusing for a lot of people. This may be due to the unlimited amount of options available for you to do with money. It can be spent, gifted out, saved, or invested. Deciding how to use money is the first step to becoming Financially independent.
Savings and investing are some of the most important steps taken to increase wealth. This is because these two processes have to do with reserving and growing money. Many people often wonder whether to save or invest.
Well, this article is going to explain the difference between saving and investing.
What are Savings?
Saving is the reservation of a certain amount of money. Savings is about putting money aside for future use. It is usually recommended that we save about 20% of our monthly income. Money saved can then be put towards future purchases and emergencies that may arise. There are many reasons why you should save money.
Savings are generally kept in trusted locations such as banks, saving Cooperatives, etc. This money is easily accessible and can be withdrawn at any time. This is unless the money is locked in a fixed deposit, then withdrawal may be limited till the agreed date.
What are Investments?
Investment is concerned with the use of money to fund or back an enterprise in hopes of profit in the future. It involves a certain amount of risk and reward. The higher the risk involved in the investment, the higher the reward. Stocks, bonds, mutual funds, or even real estate are industries that can be invested in.
The main aim of investments is to use capital to generate substantial financial gain. Investments are usually aimed at accomplishing long-term goals. They also allow you to diversify and have different assets in your portfolio.
What is the Difference Between Saving and Investing?
Now we know the meaning of savings and Investments, what are the differences between these two?
1. In savings, There are No capital Requirements, But in Investment, Capital is Required
Savings is from money already earned. There is no specific target to be met at the start of savings and people can begin with as little as N10. There is the freedom to set a pace comfortable for you and any target set is done personally.
However, investment requires capital to begin. Every investment opportunity requires a certain amount of monetary capital. This means there is a target that may or may not be attainable. Not many people can afford to invest due to the need for capital.
2. Investing Has An Element of Risk That Savings Don’t Have
Because investing involves a certain amount of money inputted into a venture with an unknown outcome, there is a high level of risk.
Investing is literally betting on a risk hoping it will turn out in your favour. However, savings don’t have this level of risk and are a safer option.
3. Savings are Best for Short-term Goals, While Investments Are Lor Long-term Goals.
Investments can take months or even years to show the requisite profit. However, savings can be tailored to your needs. You can save for short-term goals like buying a car or buying a house.
You can decide to save for 2 months or even two years. However, investments are usually tied up for years.
4. Savings Generally Have Lower Interest Rates Compared to Investments
Because investments have a high level of risk and require capital, they also have a higher interest rate leading to higher profits. This also means that if the investment goes wrong, there is a higher loss.
However, savings have low-interest rates because of their low-risk nature.
How Do You Decide Between Savings and Investments?
There is a very easy way to decide between savings and Investments. If you have available capital and a steady source of income, then you may consider an investment.
This is because you have ready cash to put into investment and a steady source of income to live on while the investment grows.
However, if you have a low source of income and no ready cash, try saving up as it requires no capital and can be tailored to your available income.