Investments Vs Savings: What You Need to Know
Most of us were taught at an early age about saving our money for a rainy day, but few of us were taught about the other “basic” of handling our finances, which are investments. Saving is important because it assures us of available funds in case we ever need it in emergency situations, but investments is equally crucial in order to grow our money.
Investments vs savings
While both savings and investments are important components of preparing for an uncertain future, it’s important to not key differences between the two. Saving is essentially setting aside the money that we earn so we have some when the need arises. We save money for things we’d like to buy or experience, but we also save for unexpected expenses, such as hospitalization, a project at school, or when our vehicle breaks down.
Some people typically keep track of their savings or set targets so they’ll know how much they need to save during a set period of time. For example, if you’re a student and you want to buy a pair of shoes, you can calculate how much you need to save from your allowance daily or weekly so you’ll have enough to buy the shoes after a few months. You can also choose to save a pre-determined amount of money from your salary at work that will go to your “emergency fund” in case you get sick and need to go see a doctor.
Investments, meanwhile, refer to putting your money into certain assets that have the potential to appreciate in value over time, thereby increasing your money’s worth. Assets can take the form of specific things like equities or stocks, mutual funds, or real estate. But you can also invest in a business, which will hopefully earn enough to recoup your investment and eventually keep earning so you have a steady stream of income.
One important difference between saving vs investment is the element of risk. When you save, you’re essentially just keeping the money that you have in something like a savings account in a bank or in a physical object like a safety deposit box in your own home. You have easy access to it if you ever need it, and the risk that you will lose it is very low.
High risk, high gains
That might sound like a good thing, but, at the same time, saving also generates zero to very low gains. That means that when you save P1,000 in a bank here in the Philippines, where the interest rates are only 0.10 to 0.25 percent p.a. (per annum or annually), the most you’ll earn is P2.50 in one year. And with rising inflation, there’s a chance that your money might actually end up much lower in value than when you started.
On the other hand, the main goal of investments is to end up with more money than with what you had at the beginning. The potential for profit or returns is much greater, as are the risks.
“Investing comes in various forms,” writes Henry Ong, who writes the Financial Adviser column for Esquire Philippines. “Depending on your risk profile, you can invest in different assets and come up with the best combination that will give you the highest return possible at the risk you are most comfortable with.”
Examples of investments
In a previous column, Ong suggested five specific instruments where people can choose to invest—instead of saving it in a regular account—so people could make their money work for them. These include:
- Income securities, or money market funds that pay regular interest. There are commercial papers issued by listed companies, or bonds issued by the government, which are normally risk-free (because there is virtually no chance the government will default on payments).
- Dividend-paying preferred shares, which typically offer five to seven percent interest p.a. plus potential for capital gains when share prices go up.
- Growth and dividend stocks, or stocks that pay dividends regularly similar to preferred
shares. According to Ong, Philippine stocks have generated excess returns of over 15 percent over fixed income securities in the past 10 years.
- Real estate. Investing in real estate can generate regular cash flows and long-term capital gain. If you invest in a condominium unit, for example, rental income can provide yield after commission and expenses of about seven to eight percent.
- Business ventures. Although Ong cautions that almost 90 percent of new businesses fail within the first few years, those that do succeed can have massive returns. To lessen risk, Ong suggests investing as a partner with other like-minded entrepreneurs on a new business.
When it comes to saving vs investments, it’s critical to understand the importance of both. We need to save money in order to access funds for specific needs and wants in the short term, but we also need to learn about investments so we can prepare for what lies further ahead in the future.