People do not always understand the difference between saving and investing and the two are sometimes confused. However, understanding and putting both concepts into practice will go a long way to ensuring your financial future.
In a nutshell, saving is the short-term practice of putting money away for a goal or unexpected expenses and investing is the long-term strategy of putting money away and letting it grow. It is important to understand the difference between saving and investing, as they are two ways of making your money work for you so that you can achieve different goals.
Savings is regularly putting away part of your income into a low or no-risk account. When saving, your money is guaranteed to earn a specific amount of interest and the original deposit is safe.
Regular deposits gradually build up, and this money can be used at a later stage. Savings is vital as building up reserves is an effective way to ensure that you are financially secure when unexpected expenses such as a medical emergency or a car breakdown have to be paid. It is also a way of paying large expenses such as holidays or school fees without taking on debt.
Every single person with an income should be saving. Those who haven’t started usually use the excuse that they don’t have the money. However, in most of these cases, if they scrutinize their budget they will find that they are spending money on unnecessary items and expenses, such as drinks or entertainment – this money can be saved instead.
Another myth is that you need lots of money to save when in fact, putting away just GH¢100 a month will jump-start this critical step in your financial journey.
Investing on the other hand is when you commit money for the long-term and let it grow. It is different to savings in that there is no set or guaranteed interest rate, and there are varying levels of risk meaning that your money isn’t always fully guaranteed. However, the potential for profit or more aggressive growth is much higher.
Investing may seem intimidating, with concepts like stocks, unit trusts or bonds but it is important to understand that investing is not gambling. One can rather describe it as the next step after saving that will make your money work for you and provide additional income in the future.
If you are just starting out, opt for something that is not too daunting. There are multiple options available to save or invest with most financial institutes.
The grid below provides a snapshot of the difference between Saving and Investing.
Type of Account:
Formal : Savings Account
Informal: Susu (Daily, Weekly)
Quoted returns guaranteed
Short term goals: 3 months to 5 years
Type of Account:
Mutual Funds, Unit Trusts, Stocks, Property, Bonds
Regular deposits or once-off
Returns not guaranteed
Long terms (10 years and more).