Are you an investor or saver or both? What’s the difference? Which is better? You might encounter these three questions sometime in your life when it comes to working with your money and how to grow it.
Generally in the financial services sector there is a difference between the two, albeit subtle and possibly vague at times. Yet despite the difference you should be both a saver and investor to have a well-rounded financial portfolio.
What’s the difference?
When their child suddenly presents them with a word that they have never heard before, most parents refer them to the good old dictionary. Sure these days it’s online but the principle is the same. So let’s see whether there is a dictionary difference between investing and saving according to the online Oxford Learner dictionary:
Investing: to buy property, shares in a company, etc. in the hope of making a profit.
Savings: an amount of something such as time or money that you do not need to use or spend.
It is evident that there are differences and it’s interesting to note how, according to the online Oxford definition, investing seems more purposeful in nature i.e. trying to make a profit, while savings seems more subtle, with a cautious undertone – well that’s my take anyway.
Generally savings is associated with short time periods, like one to two years, and are low-risk products (chance of money loss is low) that primarily earn some kind of interest on your money. These products mainly serve your short term financial needs as they are more predictable in nature. In other words you know exactly how much interest you can earn on your money and thus can plan your affairs with relative ease.
Savings are great to help you out when you’re faced with financial difficulties, like in this time of Covid chaos. Emergency savings can help alleviate financial strain and stress. The good old emergency fund is a prime example.
Savings are more predictable, but unfortunately you don’t always grow your money via this method as much as you could if you were ‘investing’. Savings rarely beat inflation over the longer term (eight years plus) and hence one does not really get wealthy through savings.
Savings are essential to help protect you from making bad financial decisions like using your long-term investments to cover emergencies and other things like holiday trips, purchasing a new car or some fancy new tech gadget.
Savings include among others cash in the bank, money market investments, money market unit trusts, fixed deposits, term accounts or notice accounts and short -dated bonds.
Again all of these options generally provide you with ‘predictable’ interest on your money and have their place.
Generally investing is associated with longer time periods, like two years and beyond, and tends to be in higher-risk products (chance of money loss is higher than with savings). Investments use a wide range of options to help grow your money. These include investing in property, shares in companies (on stock markets), exchange-traded funds (ETF), currencies, gold and other commodities to name but a few. Basically anything that does not provide a predictable interest can be seen as investing.
These products mainly serve your longer-term financial needs as they are more ‘unpredictable’ in nature yet tend to generate inflation-beating growth over time. As an example you could invest in a new shopping mall that suddenly gains popularity over time and generates huge growth for your money. The converse also applies that if the mall performs poorly and does not grow you could lose money.
Investments are best suited for things like your retirement years, kid’s education and other longer-term goals. Investments extract the greatest value over time.
Ultimately investing creates wealth.
Which is better?
The short answer is it really depends on your financial objective and time horizon. The better answer is that both are essential when it comes to a solid financial plan.
An investor does not have a firm foundation without being a saver, and a saver does not have the best chance of creating wealth without becoming an investor.
As an example
A (pure) saver has cash available to cover emergencies and other nice-to-haves like a holiday, but has no long-term wealth-creating resources.
An investor’s wealth creation can easily be undone if they don’t have savings to help cover emergencies. Such investors typically tap into their long-term investments to cover short-term emergencies and cash flow issues and hence destroy their wealth creation.
One thing is certain: being a saver or investor is better than being neither. But ultimately if you want to work smartly and grow your money you should be both.