Saving vs investing: The key differences
Those who have financial goals may wonder whether it is better to save or invest in order to achieve them. In reality, these two very different actions do not cancel each other out. On the contrary, they can be complementary and, if used wisely and – especially in the case of investments – with the help of experts in the field, they can increase the chances of achieving your goals.
For example, those who want to accumulate a small amount of capital to take the trip they have always dreamed of or to offer their children the opportunity to study abroad can start by regularly setting aside a little money. Over time, they might consider investment solutions such as a GIA, mutual funds, or other options that align with their goals and risk tolerance, including products like Moneyfarm’s stocks and shares ISA.
But what are the main differences between saving and investing? Let’s find out together in this article.
What does saving mean and how it can be done?
In finance, saving essentially means setting aside part of your earnings for future use.
By their very nature, savings guarantee a high level of liquidity and security, as they are immediately available and not subject to market fluctuations, but they also offer a low rate of return.
Although it may seem like a daunting task, especially for those on a low income and facing numerous expenses, saving is not impossible. To succeed, you first need to carefully calculate your monthly income or that of your household, as well as all your expenses, dividing them into essential and non-essential items. Once you have done this, you can proceed to review each item of expenditure, cutting at least some of the unnecessary items and looking for ways to reduce the essential ones.
If you need help, in addition to relying on expert financial advisors who can draw up personal financial plans that are truly in line with your financial possibilities and objectives, you can resort to some tried and tested techniques and strategies.
These include, for example, the 50/30/20 technique – useful for dividing your income between essential, non-essential and savings – the envelope method – perfect for setting aside sums of money on a regular basis – and the 24-hour technique – ideal for those who cannot resist the temptation to make unnecessary purchases online or in physical shops.
When to start saving
Saving is always a good idea. There are many reasons to start saving, ranging from creating an emergency fund to setting aside money to buy a house, start a business, enjoy a more comfortable retirement, and so on.
Among the many reasons that can motivate people to save is the desire to accumulate a sum of money to invest.
What does investing mean?
Investors do not simply set aside sums of money, but use them to purchase securities, fund units, ETFs, real estate or any other asset or instrument that can offer, in the short, medium or long term, and if the investment performs well, a higher or lower return.
Unlike savings, investments involve risks that can lead to capital loss or failure to achieve the objectives set, as well as a variable level of liquidity.
To avoid making serious mistakes, investing too much or embarking on investments that are too risky for your financial means or emotional stability, it is always best to avoid doing it yourself and seek advice from experts in the field.