It’s the age-old debate–what to do with your excess money? Back before money came into the picture, people earned what they wanted to consume, and did not think about retirement. But as the human necessities grew and became more and more complex, the need for a ‘rainy day’ fund became apparent. And so, we learned how to save money.

Saving Vs Investing

The two terms may come across as confusing as sometimes they are used interchangeably. However, there are drastic differences between the two terms when it comes to personal finance. Knowing the differences will equip you with the tools to make the best decisions suiting your financial needs and goals.

What is Saving?

In finance, saving can be identified as merely putting your excess money aside without spending it. The whole idea behind ‘savings’ is the excess of earned money after spending for your needs and wants.

So, this excess money could be preserved in your wallet, a piggy bank, a drawer in a cupboard, in a safe, or by modern financial standards, in a bank. Wherever they are, you will have the face value of the money preserved with you.

Face value or nominal value of money is the actual number minted on the notes and coins you have. A $10 note has a face value of ten dollars and this will not change forever. However, the real value of money is a different scenario, to be discussed later on.

Pros of Saving Money

For the purpose of this example, let’s assume you save money in a bank account–a savings account, which is the most sensible option in the modern world. Here are some of the benefits of saving money;

• you will not lose the face value of your money. i.e. if you had saved $1,000 every year for 10 years, you will still have $10,000 saved, bare minimum, at the end of 10 years,
• relatively high liquidity: your money will be easily available to you when you need to spend it on something,
• little to no risk: your money will be sure in a (hopefully) government-regulated financial institution, and even if the institution goes bankrupt, your money will most likely be safe,
• earning an interest: almost all financial institutions pay interest (a %) on the amount of money you have saved with them.

Cons of Saving Money

There are very few disadvantages of saving money objectively. However, we can dig up some when comparing with investing;

• low return: low risk = low return, and this is true with saving money. The interest rates given by financial institutions will be some of the lowest yields in the market,

What is Investing?

Investing, too, involves setting aside the excess of money earned after the individual’s consumption is done. So, the difference between saving and investing becomes a matter of where you set the money aside.

There are many different options for you to invest money. The most popular investment method would be opening a fixed deposit account, purchasing stocks/shares of companies. However, a few other options are; government securities such as Treasury Bills, Treasury Bonds, purchasing gold, housing, land, or a combination of these.

Real Value of Money

Investing is where you will get a real shot at preserving the ‘real value’ of money. ‘Real value’ of money is the amount of goods and services a certain amount of money can buy at a given time. We all know that inflation is the cause of the decrease in the real value of money over time. For example, if you could purchase a carton of milk for $10 today, in another couple of years, the same carton of milk is bound to increase in price, let’s say for $12. So, what you could purchase for $10 now, is unfeasible in a couple of years. The real value of money has gone down by $2 in two years. Although on face value, you still have $10, you cannot purchase the same product with the $10 you have.

In the ‘savings’ section, we discussed that you can earn a return on your saved money called ‘interest.’ However, chances are the interest rate you will get is either on par or lower than the country’s inflation rate. If the interest rate is lower than the inflation rate, you are bound to lose the real value of money. Although you will still have the face/nominal value of money left with you, the amount of goods and services that money can buy would have reduced in a few years.

In investing, you have the chance to earn a higher return. However, as the norm goes, only higher risk = higher return.

Pros of Investing

• ability to earn a higher return: almost all modes of investments mentioned above will earn a higher return than an average savings account,
• ability to grow the initial investment: if you invest in shares of a company, chances are these share prices will increase as the company grows. This means that besides the dividend return you have been getting, your initial investment will increase in value too.

Cons of Investing

• higher risk: investing is usually bundled with the term ‘risk.’ There is a chance that the company you bought shares in might go bankrupt. There is a chance that the gold market could crash. There is a chance that the housing market could crash like it did in 2008. The lowest risk investment in the above list is with the government.
• less liquid: investments are usually not readily convertible to cash. There will be a certain time loss and potentially fees involved.
• relatively long-term: be prepared to set aside this money for a relatively long period, i.e. minimum 1 year.
• no guarantee of the initial investment: just as how we explained how the investment could grow, it can diminish as well. A company can perform poorly and lose the value of its stocks, leading to a drop in the investment value of that company.

What is Right for You? Saving or Investing?

At a glance, it does look like there are just too many cons with investing over pros. And the exact opposite with savings. So, the decision should be easy right?

If you think the answer is “Yes, it is easy,” maybe savings might the way to go for you.

However, if you stopped to think that the decision is not that easy, you should weigh your options. There is little to no growth in ‘easy’ playing fields. If you want to see actual growth in the value of your money, investing is the path to take. It does come with a certain degree of risk, but you have to find ways to absorb or mitigate the risk for the best possible return for your money.

Investment Portfolio

One of the best ways to minimize your risk with investments is to diversify your investments. Maybe don’t invest all of your money in shares of one company. Maybe don’t put all your money into purchasing houses. You get the idea.

The benefit of diversifying your investments and creating an investment portfolio is that even if one stream of investments fails, there could be another stream that could soften the fall or even make up for any loss of wealth. Maybe Company X will suffer in share prices while Company Y will outperform expectations thus compensating for any wealth you lose with your investment in Company X.

The more knowledgeable you are, the better you will be equipped to make your savings or investments decisions and to tackle the risks associated.

However, the final decision comes down to your financial situation, and your financial goals.