Saving vs investing – do you know the difference?
People do not always understand the difference between saving and investing and the two are sometimes confused. However, understanding and putting both concepts into practice will go a long way to ensuring your financial future.
“In a nutshell, saving is the short-term practice of putting money away for a goal or unexpected expenses and investing is the long-term strategy of putting money away and letting it grow,” says Eunice Sibiya, head of consumer education at FNB. “It is important to understand the difference between saving and investing, as they are two ways of making your money work for you to achieve different goals.”
Savings is regularly putting away part of your income into a low- or no-risk account, meaning that your money is guaranteed to earn a specific amount of interest and the original deposit is safe.
Regular deposits gradually build up, and this money can be used at a later stage. Savings is vital as building up reserves is an effective way to ensure that you are financially secure when you are hit with unexpected expenses such as a medical emergency or a car breakdown. It is also a way of paying large expenses such as holidays or school fees without taking on debt.
“Every single South African with an income should be saving,” says Sibiya. “Those who haven’t started usually use the excuse that they don’t have the money. However, in most of these cases, if they scrutinise their budget they will find that they are spending money on unnecessary items and expenses, such as clothes or entertainment.”
Another myth is that you need lots of money to save; putting away just R100 a month will jump start this critical step in your financial journey.
Investing is when you commit money for the long-term and let it grow. It is different to savings in that there is no set or guaranteed interest rate, and there are varying levels of risk meaning that your money isn’t always fully guaranteed. However the potential for profit or more aggressive growth is much higher.
“Investing may seem intimidating, with concepts like stocks, unit trusts or bonds,” says Sibiya. “However, what you need to understand is that investing is not gambling and is the next step after saving to make your money work for you and provide additional income in the future.”
If you are just starting out, opt for something that is not too daunting. There are multiple options available to save or invest with most financial institutes.
Difference between investing and saving
|Type of Account||Formal: savings account
|Unit trusts and ETFs (exchange-traded funds)
|Deposits||Regular deposits||Regular deposits or once off|
|Returns||Quoted returns guaranteed||Returns not guaranteed|
|Timeline||Short-term goals: 3 months to 5 years||Long-term (20 years or more)|