A key focus of my blog is Financial Literacy/Money. A key aspect of this subject area is understanding the difference investing and saving. Both are very important terms which can actually complement the other. Understanding the two further can change lives. The following contributed post is entitled, The Difference Between Investing And Saving.
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Investing and saving are two fantastic options for anyone looking to be smart with their money. At a base level, they both serve the same purpose; you want to put money aside, with the aim of having more in the future.
But, some fundamental differences show both options have their own pros and cons.
Investing is far more complex
It’s easy for anyone to open a savings account and start saving money. You don’t need much financial know-how at all, just a brief consultation with a financial advisor at your bank will give you everything you need to know. Essentially, you open an account, put as much money as you want in there, and the interest rate sees it grow year by year.
With investing, you have something far more complex. There are loads of different ways to invest, and each option also contains more choices as well. Take the stock market; you have loads of different things to invest in, from futures to options – and everything in between. Then, you have to look at things like option historical data, previous sales, current market trends, and so on. It’s so incredibly complex, making it hard for the average person to get involved. Typically, you need to take in a lot of knowledge to get to grips with stock market investing. Bear in mind, this is just one example, you also have property investment, forex – the list goes on and on. Saving is simple, but investing is definitely very complicated.
Saving returns are restricted by interest rates
When you put money in a savings account, it will increase in value over time. This is due to interest rates, but the catch is that interest rates are usually horrible. In essence, this means you don’t get outstanding returns, and you have to keep your account open for many years before you see anything substantial.
So, saving returns are restricted by interest rates, but investment returns aren’t. Your return on investment varies depending on the market conditions. In some cases, you can earn colossal returns after just a few months – it depends on the investment. If you were to compare savings and investments with regards to their returns, then savings definitely come out second best.
Investing carries more risk
The flip side of this is that investing carries more risks. With a savings account, you haven’t really got any risks at all. The money sits there collecting interest, and you don’t have to worry about anything.
With investing, there are so many variables. A market crash can make your investment plummet in value – or the company you’ve invested shares in could close down. Companies are always at risk of closing, and even if you think you are hedging your bets by checking the Caterpillar shares prices, a company as big as Caterpillar is not immune from any adverse conditions. There is always the notion of risk when you are investing. It’s always worth bearing this in mind, and if you plan on investing in a business, you may want to invest in a company with more sway and notoriety, but this is by no means a “sure thing”. If you invest in property and the property market experiences a dip, then you’re in trouble. The point is that you may get better returns, but you’re taking a bigger risk.
Ultimately, either option is an effective way of using your money. They’re both far better than reckless spending! The best way to summarize the differences is that investing is riskier, more complicated, but can grant higher rewards. Generally speaking, it’s a smart idea to try both ideas if you want to do more with your money.
