The words “saving” and “investment” are often synonyms. However, these are not the same ideas, as your decision between the two approaches may drastically alter your long-term financial stability. We will see in the first place what saving is. Next, we will see what investing is, and finally, we will compare the two strategies with a concrete case. Before we start, some people are afraid of the word “investing” because, for some, it rhymes with loss. Even if we do not go into detail about the investment strategies, it is possible to start without any skills in crypto with a
BTC bot that will take care of investing for you without risk of loss. So let’s start from the beginning. We will explain it all.
What Is Saving?
Saving simply means setting aside some of your earnings. Instead of spending your money immediately, you save some of it for later.
One of the most prevalent methods of saving money is depositing funds into a financial institution’s savings account.
Saving is often viewed as the best approach because it eliminates all potential loss on the investor’s part. But nevertheless… The
saving account rate is about 1%. Annual inflation averages 1.1%. This means that any interest you receive on your money won’t keep up with inflation.
If you plan to use your funds for something temporary, like a trip or a car, this isn’t too much of a concern. This becomes a significant annoyance when saving for a long-term goal, like a house or apartment. What happens here is that your purchasing power decreases.
What Does Investing Mean?
Buying something (stock, bonds, property, crypto, etc.) with the expectation of a financial return higher than the purchase cost is an example of investing. There is a desire here to make a profit.
If your savings account isn’t producing much interest, you can make your money grow considerably faster by investing it. The rates of return, of course, change depending on the medium in which the investment is made.
The investment capital is not safe from loss, either. When you invest your money, you can never be guaranteed that you’ll get your money back.
What Is the Fundamental Difference Between the Two?
From a strictly economic point of view, saving is the unconsumed fraction of revenue. It consists of spending less in the present to spend more in the future. The money saved must be liquid, i.e., available quickly.
Due to these short- to medium-term perspectives, investors should only put their money into low-risk investments.
Contrarily, investing is putting money somewhere with the expectation of a future financial gain. The goal is not capital preservation but rather profit maximization. In most cases, this is done with a few years in mind.
Suffice it to say that emergency funds comprise the total of one’s precautionary savings. It must be utilized to face life’s unexpected and challenging events: a car that breaks down, taxes to pay, a health expense… Of course, rewarding yourself once in a while is also lovely.
You should have three to six months’ worth of money, depending on your circumstances. A single individual without children will not need the same amount of money as a person with a family, for example.
Investing is a bit double-edged. You invest money for the medium and long term to
create a profit. However, this gain is never assured, and you must be willing to take the event of a loss.
The choice between saving and investing is a question of personal requirements and choices. Several factors, including your projects, goals, level of risk acceptance, age, career, personal situation, etc., should be considered.
What’s best for you is something only you can decide. One definite thing is that you can start investing at any time, regardless of how early or late in life it may be.
Example of a Situation: Saving vs. Investing
Here’s a specific example to help you understand the difference between saving and investing.
Let’s imagine that James and Rosie both work in the same field and bring in an annual wage of $50,000. Each year, Peter and Chloe save 20% of their pay, equivalent to $10,000.
But each follows a different strategy. Rosie invests in various things, but James keeps all his savings in one safe place. While Rosie’s portfolio generates 5% annually, James’s savings account only generates 1%.
What happens after 40 years of working? Well, it’s straightforward: while Rosie will have (possibly) accumulated $1,200,000 in compound interest, James will have accumulated only $500,000, even if he makes the same wage and puts aside precisely the same amount!
It makes you think, doesn’t it?