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Saving and investing have the same goal: make your money grow over time to be better prepared for the future and reach your financial goals. Still, they’re quite different regarding level of risk taken, potential return, type of investment products used and time horizon.
Savings typically refer to the money that remains after covering all your living expenses, which you set aside in specific accounts within banks. These accounts allow you to earn interest on your deposits over time and may include savings accounts, high-yield checking accounts, money market accounts, or certificates of deposits (CDs).
Usually, savings are used to create an emergency fund for unexpected expenses and to reach your short-term goals. While with some of these financial products you cannot take a withdrawal during a specified length of time, such as with CDs, others grant you access to your money whenever you want.
Pros of saving
Cons of saving
Investing allows you to use different financial instruments and products, such as Stocks, Exchange-Traded Funds (ETFs), Index Funds, and Mutual Funds, among others, in the expectation of higher returns to make your savings grow over time and reach your longer-term financial goals, like your retirement, your children’s education, or a down payment for a house. Of course, the level of risk is higher than with savings, but the potential for returns is also higher.
While most people think about investing as synonymous with the stock markets, your investment portfolio should always include a percentage invested in other markets, like the real estate or bond market to potentially lower your overall risk. You can also invest in other asset classes, such as the cryptocurrency market or the Forex market.
Pros of investing
Cons of investing
Now you might be wondering how to get started building wealth over time. When should you start? Should you mostly save or invest? Which markets should you focus on? Well, the answer is that it all depends on your age and your financial, professional, and family situation, as these factors will impact your risk appetite, your investment horizon, your financial goals, and your overall investment strategy.
Saving might be more appropriate for younger people with little money left at the end of the month and those who have a short-term goal (less than one year), while investing will be easier for those who have already set some cash aside, have no high-interest debt on credit cards or other debts, and are operating with a longer time horizon (minimum five years).
Younger investors also have time on their side, which means that they can turn to riskier financial assets like growth stocks, compared to older investors with a shorter time horizon who will usually focus on more conservative financial assets like bonds and cash or cash equivalents. The power of compound interest also helps young investors potentially accrue additional profit over time, so start saving and investing as early as you can!
Another factor to take into account when deciding between saving and investing is the global macroeconomic outlook. When central banks decide to increase their key interest rates (like the Cash Rate in Australia or the Fed Funds target rate in the United States), it means that low-risk savings accounts will also offer higher interest rates on your deposit (and vice-versa in times of accommodative monetary policies).
Of course, saving and investing are not mutually exclusive. They are actually two sides of the same coin—both are necessary for achieving financial stability and prosperity. So, by saving and investing simultaneously, you can effectively manage your finances and secure your financial future.
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