10 Jun Saving is less cool than investing but…
What is the difference between savings and investment? While there are intrinsic differences between the two counters, the real answer lies in one’s needs. Find out more about the differences and the natural synergy between savings and investments.
SAVING
Short term. Typically saving towards smaller, near-future needs such as a deposit for your home loan, or car, an emergency or a holiday.
Minimal risk. Few financial products are without inherent risk, but savings products have minimal or negligible risk.
Earn interest. Savings accounts earn interest which is generally lower than what you might find in an investment account. This is a risk: reward trade-off. Security and accessibility versus return.
Ease of access. While some savings accounts may have a short notice period, funds are generally easily accessible.
INVESTING
Longer term goals. Investing is intended for longer term goals such as funding a child’s education or building retirement funds.
Reduced accessibility. Depending on the type of investment, it can take longer to access your money compared to a savings account. The other factor to consider has less to do with administration but if the market is low, you may prefer not to access funds at that time as you may suffer a loss. Conversely, if the market is climbing you may not want to withdraw funds in a climbing market.
Involves risk. Investment guarantees are seldom, and you may lose some (or even all the funds invested). This is partly the reason why investments should be seen as a long-term commitment. Markets rising and falling are as normal as sunrise and sunset and when the market bounces back after a fall, your investment can recover and grow. It’s called ‘rand cost averaging’. If you stay in the market, your investment buys more units at a lower price. Depending on your risk appetitive and time horizon, low-risk, medium-risk and high-risk investments are available options.
Earnings potential. Investments typically have the potential for higher return or higher interest rate than a savings account.
Ideally, you want your investment and savings plan to complement each other. The example mentioned earlier is a good reason for finding a balance. If you’re faced with an urgent need for cash but have no supporting savings, you could be forced into taking an expensive loan. However, the high interest rate on the loan is likely to exceed the growth of your investment so you’re going backwards. Secondly, if you access investment funds, the timing might be wrong – your investment fund might have dropped due to market conditions, or – in a bull run – you’re losing the opportunity of impressive growth on the funds accessed.
While savings might be less cool than investments, having the two counters working together for you is ideal.
Salt Employee Benefits
Salteb.co.za
With its roots stretching back to 1953, Salt Employee Benefits is a privately owned pension fund administration company with over 900 000 members, and an average of 100 000 claims managed each year.