Savings and investment are terms that are often thrown around when you talk about finances. You probably already know that these are ways for you to grow your wealth, but do you know exactly how they work? Should you save or invest your money? How do you know which is a better choice for you? How do you go ahead if you wish to save or invest?
Many people, especially those who are new to the world of finances, do not understand that saving money and investing money are two completely different things. Sure, both of these help you in growing your wealth, but they both have different strategies and play significantly different roles in your finances. Understanding this difference is essential if you wish to build your wealth effectively and gain financial independence.
In this article, we discuss the meanings of savings and investments, the differences between them, how they help you in growing your wealth and how you can set up a savings account and an investment account .
Put simply, saving money means putting aside cash for future use or emergencies. This money is kept somewhere safe, such as a savings account or a checking account with financial institutions. This money that you have parked aside can be accessed in a short amount of time (a few days in most cases) and comes with little to no risk, with the least amount of taxes.
Saving money is often considered a safer option than investing because it is highly unlikely that the amount of money you have in your account will decrease unless you withdraw your funds. However, compared to investing, putting your money in a savings account means that your wealth grows slowly because of the interest rates.
The drawback is that usually, interest rates are lower than the inflation rate, which means that the purchasing power of your savings could decrease over time. This may make it seem like the investment is a better way to get rich, but that is not always the case. When you invest your money, the returns may be higher in most cases, but there are times when the value of your investments may go down. In other words, with higher returns, you also have to face higher risks.
When is saving a good option?
Saving is a great option for when you need to have a financial net to fall back on in case of unforeseen circumstances. So, if you don’t have any emergency savings yet, then opening a savings account with a trusted bank that offers a good interest rate is a smart move.
Many financial experts suggest that you should have at least one month of living expenses set aside before you start investing your money. On top of this, you should consider saving if you need the cash within a period of five years. This means that shorter-term savings should remain in your savings account. For example, if you are saving for an annual car insurance premium or if you are saving to pay for your house down payment, then opening a savings account is a smart choice.
Setting up a savings account
If you have decided that saving money is a better option for you than investing, then the next thing you need to know is how to open a savings account. Almost every financial institution, including Nedbank, offers a savings account. While making your choice, check to see if the bank offers a high annual percentage yield. The higher the interest rate offered, the faster you can grow your funds in your account.
Investing your money, on the other hand, means that you use your money in order to purchase an asset that you believe in having an acceptable and safe rate of return over time. In simpler words, investment means buying assets such as stocks, mutual funds, bonds, and real estate with the expectation that your purchase will help you grow your wealth. Investment is often used for achieving long-term financial goals.
People often think that investing is a way to become rich quickly, and this holds some truth to it. However, there are plenty of factors at play that can affect your return on investment. it is true that investment has potentially higher returns than saving, but it also comes with a much higher risk. While opening a savings account comes with virtually no risk, investing your money comes with many risks, which could result in your investment decreasing in value over time.
When you invest, your investment will be backed by some kind of margin safety, which is usually in the form of owner earning or assets. Common investments such as stocks, bonds, and real estate, which are productive assets, are all backed by a margin of safety.
When is investing a good option?
You should consider investing your money if you already have an emergency fund in place. Financial experts suggest that the best time to start investing is when you have savings that can cover up to two or three years of your living expenses.
Many may say that three to six months of living expenses saved up is enough for someone to start investing, but it is important to note that this is just a starting place. It won’t hurt to shoot for higher savings before you start investing. After all, your savings is like the foundation upon which your finances are built.
You may also want to consider investing if you have already paid off all your debts that have high interest rates, such as credit card balances.
Setting up an investment account
If you wish to invest your money, the first step is to open an investment account. At Nedbank, we offer a wide range of investment accounts depending on the period of investment. Whether you want to invest your funds for a short, medium, or long term, we can help you choose the best investment account for you.
Depending on your current financial situation and your goals, both savings and investments offer their own set of pros and cons. Make sure to carry out thorough research before making a decision.