Savings vs Investments
When I was starting to invest, I had the urge to go ahead and take the plunge instead of building an emergency fund first. And even after I had an emergency fund, I wanted to go ahead and put all my money on stocks and equity funds.
I would later learn it’s a somewhat natural reaction, as other beginner investors I knew and some readers who’ve contacted me either did the same or wanted to do the same.
Both savings and investments are essential for you to grow your wealth and remain debt free. Yet, both are highly different concepts. Thus when should you save and when should you invest? First, it is important to differentiate the definitions of what savings and investments are.
Savings is defined as putting some money from your income aside where it is easily accessible ( meaning that you can withdraw the money anytime you choose). It is done in a bit by bit manner, where you eventually accumulate a large sum of money over a period of time. Typically, savings are used for short-term goals such as going on a vacation or in times of emergency situations.
Investment is defined as using your money as a capital to buy assets that will increase in value over time. Usually, it takes a certain period of time before your investment yields results. They are utilised for long term goals such as paying for your child’s university education. Typically, investors invest in stocks and properties.
Depending on what your financial goals are, here are the differences between savings and investment:
Short term vs Long term: Savings are able to deal with your short term goals that does not require a huge sum of money whereas investment are for long term goals that are at least 5 years away.
Accessibility to cash: Savings are usually stored in your bank savings account where you can withdraw anytime using your bank ATM card. For investment, your cash is locked up in an investment money where they are used to invest in stocks and bonds. It is harder to have access to your money if you need it urgently.
Potential risks: There is lesser chance in seeing your savings wiped out in one go compared to investments. Investments are highly volatile and there is no way you can predict how the market will behave tomorrow.
Potential Returns: Despite the unpredictability of investments, when done right, has the great chance to bring in a good amount passive income compared to savings where you will only get a small percentage of interest rate in return for storing your savings in the bank.
In order to achieve the best financial state possible, you have to save and invest. First, you have to be clear of your financial goals eg. intended assets after 10 years. Even though investment may sound like a good way to accumulate your wealth, ensure you are debt free and have a certain amount of savings in your bank for rainy days since it will be difficult to access that money if something drastic happens. As a rule of thumb, save if you intend to use your money in less than five years and invest if you intend to use it for more than 5.
If you are still unsure, talk to a trusted financial advisor where he or she will get a better understanding of your current financial state. Set achievable savings and investment goals. Spend wisely and the road to financial freedom will be much easier than you think.
Hui Min is an amateur investor who strongly believes in the art of achieving financial freedom. She is also a lifestyle writer of ShopBack where she gets to shop and save at the same time.
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