In this article, we look at two key different financial concepts: saving and investing. At its most simple, saving is normally something you do for a short-term financial goal, or to cover yourself in emergencies. Investing, on the other hand, is done for the long term – with an expectation of a return. Read on to find out more detail.
Once you’ve set your financial goals, saving and investing will be crucial to achieving them. Each will play an important but distinct path on your journey towards greater financial freedom. With both of these techniques, you’ll be putting money aside – but each will be for different purposes.
After you’ve covered your budget for the month and spent money on the important basic things such as rent, your student loan, some entertainment and of course, groceries, you’ll hopefully have some money left over. If you put this towards your savings, this will typically help you reach for short-term financial goals.
For most people, this will mean having enough money to cover yourself in an emergency, typically around 3 months worth of your basic expenses budget. This money can be left in a savings account, meaning that it earns little interest but is easily accessible for when you might need it most.
Other short-term goals could be to buy a new car, or maybe to save towards a first down payment for a house.
Once you start investing your money, you’ll be actively be placing your money into the markets– this means that you’ll start to expect a return on your investments.
When you invest in the stock market, you’ll generally be purchasing a small portion of a company. By buying a bond, you purchase the debt of a government or a company. With a fund purchase, you’ll be paying for a basket of stocks, bonds, or cash, or possibly a blend of each, depending on the aims and objectives of the particular fund.
By investing your money like this you will have the chance to earn a return – this means that your money can grow and beat inflation. Investors generally hope to earn more money from their investment returns than they would typically get from a savings account.
Money placed into a savings account will generally be very safe. The Financial Services Compensation Scheme run by the Financial Conduct Authority will protect deposits and savings up to £85,000 for registered banks.
The downside is that savings accounts typically over low interest rates, mostly under the rate of inflation. Over time, this means that the real value of your money will diminish. If the bank charges fees as well, this can eat into your savings even further.
While you may be able to get higher returns through investing, this also comes with risks. If you’ve invested in a stock, for example, and the company doesn’t do as well as the market thought it would, then the share price could go down – meaning that you might even lose money. Typically the market will move up and down on a daily basis, meaning the value of your assets will change with it.
You can take account of this risk by trying to diversify your investments and aiming to hold on to them for the long-term. This allows you to spread the risk across different areas and hopefully ride out any short-term fluctuations in the price.
"Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it".
- Warren Buffet, Billionaire Investor
Even with these strategies though, it’s important to know that no investment is entirely free of risk.