Saving vs. Investing: Which One to Choose?
There are many myths about saving and investing. One of them is that they’re the same thing. As a matter of fact, it isn't true at all. Here’s what you need to know about saving and investing to secure your financial future.
🤔 If you have a little extra money, what would you do? Would you save it or invest it?
You might think that saving and investing are interchangeable. In reality, they’re not.
Saving is putting money aside for a specific purpose. The purpose of investing, on the other hand, is to put your money into something that will grow in value over time, creating wealth for you in the process.
Let’s see how saving and investing can work together to help secure a financial future for you and your family.
What's the difference between savings and investment?
One thing saving and investing have in common is their vital importance in our lives.
Saving helps you escape possible uncertainties and provides you with the opportunity to live a more fulfilling life. It can help you steer clear of many obstacles and hurdles if you set aside money in a systematic way.
Similar to saving, investing can help you build wealth for times of need, job loss, or for the future. But there’s one important difference between saving and investing: risk.
Because of its low risk, saving typically results in lower returns on the money you put aside. In contrast, while investing can offer higher returns, it also carries a bigger risk of loss. Simply because all the assets you buy can lose value.
It can go up or down based on factors that are often outside your control. This includes geopolitical tensions, natural disasters, economic turmoil, or even the publication of certain economic indicators (e.g. the Consumer Price Index which is used to calculate inflation).
💡What are savings and how do they work?
Saving is putting money aside for a specific purpose.
The most effective way to save money is to set a specific goal, a target amount, and a deadline.
For example, your goal is to save €4,000 within 10 months to pay for an annual family vacation. You can then plan how much you should save every month and choose a saving strategy.
In our previous article, we shared a few simple strategies for saving money.
💡What is investing and how does it work?
Investing is putting money into something that will grow in value over time, creating wealth for you.When investing, it is important to do it smartly.🤓 This involves measuring your risk tolerance and doing your research to understand different investment assets, what they are for, and how they work.
For example, before investing in stocks, it’s advised to fully research companies you’re interested in— business costs, history of dividends, risk factors, etc.
If you want to invest in crypto, you should first learn how to buy, sell, and exchange cryptocurrencies and choose the right digital currency for you.
Cryptocurrencies can also be extremely volatile, resulting in steep losses. To avoid them, many investors choose to spread their money around and back it up with more stable investments like physical gold and precious metals.
Read our article on why cryptocurrencies are so volatile.
So, in a nutshell, choosing between saving and investing largely depends on your financial goals and personal circumstances.
When should you save?
You should save when you have a stable income but not much spare cash on hand.
As a general rule, you should build a cash savings balance that can cover from three to six months of living expenses. This way you’re protected against unexpected financial emergencies such as job loss or car wreck.
Saving is also good if you have short-term financial goals such as buying a house, saving for a vacation, or paying for college.
In short, if you plan to reach your financial goal in five years or less, saving may be a better strategy than investing.
It’s often said that there are 4 main types of saving:
- Savings in case of emergencies (to cover your expenses for some time in case something happens).
- Savings for planned, one-off expenses (like a house or a car).
- Savings for short-term goals (five years or less).
- Savings for retirement (some people prefer the stability of savings to prepare for their retirement).
But keep in mind that it's important to save with the right asset.
While most people will traditionally turn to cash and a savings account, remember that your cash savings risk losing their spending power over time because of inflation.
💡Savings account vs. inflation
A normal annual inflation rate is 2%. This means that, by the end of the year, $100 will buy only $98 worth of stuff.
That’s the reason why you may want to hold cash in a high-yield account that usually earns higher interest rates than a standard savings account. But if inflation is higher than interest on your savings account, you're losing money.
Today, when inflation is at a 40-year-high, very few (if any) savings accounts will have high enough interest rates to make up for the loss in value from inflation.
Here’s a solution:
You can put part of your savings in assets with inherent value that will protect you from inflation, like gold and precious metals.
Among other things, gold's value comes from its rarity and its long history as a stable medium of exchange. Moreover, gold's price tends to rise during times of economic uncertainty and high inflation.
Read our SPOTLIGHT to learn more about how to protect your wealth from rising inflation.
So, instead of stashing cash under your mattress, or losing it all to inflation, start saving in gold so that your savings don't go to waste.
When should you invest?
It is best to invest when you have a stable income and an emergency fund (part of it in gold😉).
Your emergency fund will help you smooth out the risks of investing. Buying an asset doesn't guarantee that it will keep its value or bring the income you expected. For instance, stocks rise and fall in value every day.
So having another source of cash to cover financial emergencies makes it easier to handle those normal ups and downs in the stock market.
If you don't have cash on hand, you may have to sell your investments fast if something bad happens. You may lose money if you sell an asset when its value is down.
If you want to start investing but don't know where to start, here are some tips you can use right away.
So should you save or invest?
Saving or investing depends on your individual circumstances and financial goals.
If you have short-term financial goals but no or little cash on hand, saving may be the option. But remember that your money may be worth less over time due to inflation, and that’s where gold savings come in handy.
In the long run, investing money may bring higher returns than keeping it in a savings account. Especially if you don't need access to your money quickly and don't mind tying it up for a few years. Still, your assets can lose value due to multiple factors beyond your control. Therefore, using gold as "investment insurance" can smooth out risks and reduce your losses when stocks or crypto fall sharply.
For many people, though, saving and investing go hand in hand. Once you’ve saved some money, it may be time to start making some investments. Just make sure you invest in a mix of riskier and safer assets to protect your portfolio from inflation and market downturns.