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Should you save or invest your money?
When it comes to wealth creation, the two most common words you’ll hear are saving and investing. Both may work well for helping a person build personal wealth, but they each need distinct strategies to help you grow your wealth.
Saving money typically refers to putting your money in a relatively safe place, like a bank, where it will accrue interest over time. Some savings accounts will allow you to grow this money by earning interest. On the other hand, investing requires putting your money into different assets to generate a profit.
While the goal of savings is to gain some accumulation of wealth but mostly to defer spending, investing is generally done with the singular goal of earning profits. However, you should remember that all investments bear different levels of risk. You risk losing all your money when you invest it, which is less likely to happen with savings.
That's why using a mix of savings and investing may be worth considering to reduce your risk and grow your money sustainably. How much to save and invest is a personal choice and depends on your goals and risk tolerance. A good rule of thumb is that savings are for the short term while investing should be done with longer-term goals.
Before you decide which may be better for your financial goals, it helps to understand the benefits and risks of savings vs. investing.
What are the benefits and risks of saving your money?
Savings are funds deposited into a savings account, which can earn interest and help increase the money in the account.
Savings accounts may be a good option if you aim to save for a particular purchase like a house deposit or holiday. The returns on your savings are determined by the interest rate offered by the banks. Some banks may offer a higher interest rate if you limit the number of withdrawals or maintain a minimum balance in the account.
Some savings accounts also charge customers account-keeping fees or other charges, which could eat into the total amount in your savings. When looking into savings accounts, you should compare fees, charges and restrictions, not just interest rates, to pick a savings account that fits your needs.
However, it’s worth being realistic about the kinds of returns you may earn from savings accounts. Due to their low-risk nature, generally speaking a savings account may earn a lower return on your investment than, say, shares or ETFs. The upside is that those lower returns are all but guaranteed, thanks to the Financial Claims Scheme offered to Authorised Deposit-Taking institutions (ADIs), which protects your investments up to the value of $250,000 in the event the bank or provider went under.
Some of the reasons why you might choose to build wealth through saving include:
- Meeting short-term goals, such as putting aside money for a holiday or an appliance.
- Saving a deposit for a car or home.
- Building an emergency fund.
- Seen as a ‘safer’ low-risk investment option.
Benefits
- Accessible - savings accounts provide easy access to your funds if needed.
- Low-risk - the returns are not linked to the market performance of an asset.
- Flexibility - you can add and withdraw funds from the account as needed. But keep in mind any possible restrictions or interest rate impacts of a balance change or withdrawals.
Drawbacks
- Lower returns - interest rates on savings accounts may not be as competitive as some investment strategies.
- Requires discipline and commitment - easy accessibility may tempt you to dip into your savings which can slow the account's growth.
What are the benefits and risks of investing?
Investing involves putting your money into different financial products, such as shares, bonds, cryptocurrency, property, etc., to generate income or profits.
Investing comes with a certain inherent risk - a lot more than using a savings account. It’s generally recommended not to put all your eggs in one basket or invest all your money in a single asset. Investing small amounts in different assets over a long period means you can diversify your risk and balance your investment portfolio.
Some of the reasons you might choose to invest include:
- Building wealth to meet long-term financial goals, such as children's higher education.
- Saving for your retirement.
- Wealth creation for your long-term financial stability.
Building a second source of income. For instance, investing in property to generate rental income.
Benefits
- Investments can provide higher returns when compared to a savings account, but you can also lose your money.
- You can choose between various financial assets based on your investment objective and risk appetite.
Drawbacks
- Higher risk, as returns depend on market volatility and overall economic conditions.
- Some people find it challenging to choose between various investment options. You might need to hire an experienced professional to manage your investments.
- Brokerage fees can add to the cost of some investments.
Is saving better than investing?
Whether saving is better than investing or vice-versa depends on your current financial situation, goals, risk appetite and future plans. Some might say the best option is to have both a savings and investment strategy. Regularly saving money can help you meet short to medium-term goals and build an emergency fund. On the other hand, investing money can help build wealth in the long term and achieve financial stability. When choosing between savings and investing, here are three things you could consider to make an informed decision:
We all know that life doesn't always go as planned. Having a reserve to meet your living expenses is important. It’s wise to build a fund that may cover your expenses for at least three to six months. If you don't have this fund built, you may want to consider building it by putting money into your savings account regularly.
Besides having an emergency fund, regularly saving money can help you meet your short-term financial needs. For instance, you can save money for a home loan deposit, a new car or even a holiday. How much to save each month depends on how much you earn, the amount you need and when you need it. You can use a savings calculator to check how much money you can save with regular deposits and calculate the interest you'll earn through different savings accounts.
On the other hand, investments are generally considered suitable for long-term wealth creation or building a second source of income. Investing requires you to put funds into certain assets for a longer period with no withdrawal due to the fluctuation of the markets and tax implications. Building a successful investment portfolio takes time and experimentation with different assets to see what works and what doesn’t.
When you put money into your savings account, you usually know the interest you'll earn upfront. This can help you calculate how much you need to deposit each month to reach your goal over a fixed period.
However, it’s harder to calculate the returns from market-linked assets (or investments), as their value generally fluctuates based on market movements. Although interest rates on savings accounts can change, they’re more stable than investing in other assets.
This is where your goals also come into play. If you need a certain amount of money by a set date, investing might not be the best strategy to achieve that goal because you can’t be certain how your investment will perform. But, if your investment horizon is over five years, you’re better placed to weather the ups and downs of the market periods over time and potentially earn inflation-beating returns.
Investments have inherent risks, and there's always the possibility of losing your initial capital. Factors like economic conditions, inflation, interest rates, and business performance impact investments and are all considered risks.
On the other hand, the money in your savings account is considered a lower-risk investment. Even though you don't earn as high returns on your savings, you are not exposed to as great a risk of losing your money.
Even if the bank where your account is located goes bankrupt, which is highly unlikely, your money is safe. Thanks to the federal government's Financial Claims Scheme, there is a guarantee of $250,000 per account, per institution.
The Bottomline
Overall, choosing between savings and investing will depend on your risk appetite. Your goals will also come into play, but it comes down to how much money you can risk losing while building wealth to meet your financial goals. If you're unsure about the right strategy for meeting your financial goals, consider speaking to a professional to determine the most suitable option for you.
Savings interest rate calculator: How much interest can you earn?
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