Should I save or invest? This is a dilemma everyone has to deal with at some point in life. They are both important, and choosing between them can be tricky.
Saving and investing are distinct financial concepts, each with a unique purpose in helping you achieve financial success.
With that in mind, how do you decide when to choose what?
This article will explore the difference between saving and investing, the functions and benefits of each, and seven things you should consider when deciding which path to take.
Also Read: How To Turn Your Savings Into Investments
The primary difference lies in the definitions. Saving involves putting money aside for future use. Often, the goal is specific, e.g., to buy a new TV, to prepare for a new baby, or go to Diani for a holiday, but it can also be unallocated.
On the other hand, investing involves a long-term strategy to seek higher returns and grow your money over time. You invest to accomplish long-term goals like educating your toddlers or planning for retirement.
The other main difference is the risk involved. Saving entails keeping money in low-risk vehicles such as bank accounts, Saccos, or MMFs, while investing involves buying high-risk assets or volatile financial instruments.
It is this difference that ensures savings help you preserve cash, stay liquid, and achieve short-term financial goals. Conversely, investing rewards you for taking risks, and if they materialise, you can grow your capital, accomplish goals faster, and achieve financial independence.
With that in mind, should you save or invest your money? To decide, you need to understand each of these concepts' functions in relation to your financial goals.
Also Read: 7 Reasons Why You Should Start Saving Now
The main reason for saving money is to ensure that you will have your money when you need it. If you have a bill to pay in three months, e.g., your child's school fees, you will put the funds in a savings instrument. You save to accomplish short-term goals with a time horizon of fewer than 12 months.
But that's not all. Savings also play an important role in ensuring that you stay in control of your finances.
Here are five reasons why saving is important
Being financially secure, especially in working years, refers to the peace of mind you achieve from gaining stability. Savings ensure you have enough money to cover monthly expenses, bounce back from financial setbacks, and avoid loans.
With enough savings, you will be ready to face any financial emergencies and storms. Whether it's delayed salary, unexpected expense, or loss of income. Without savings, you will be forced to take measures that can dent your financial security. For instance, you might have to sell an asset, liquidate an investment, or go into debt.
As they say, opportunity knocks once. And when it comes to achieving your financial goals, missed opportunities can lead to regrets and slow growth. Just as savings can prepare you for emergencies, they can also prepare you for opportunities that might help you progress financially.
For example, without savings, you can miss out on buying a piece of land or other assets listed as distress sales. Additionally, savings can also help you save on expenses. For instance, if you plan to vacation in December, you can take advantage of pre-sale packages travel companies offer during November's Black Friday and save money.
And that's all, having savings can also allow you to time the market. If you were already planning to invest in something, you could have the luxury of holding off until the timing is right.
For risk-averse people, savings eliminate multiple risks they could face while investing and protect their money in multiple ways.
The first is through KDIC Insurance. The Kenya Deposit Insurance Corporation (KDIC) provides insurance on all your deposit accounts up to a maximum of Ksh500,000. Member institutions include commercial banks and microfinance banks.
Second, it reduces liquidity risks. Unless you open a lock savings account or a fixed deposit account, you will have access to your savings 24/7. You can withdraw them at any time through mobile money or ATMs. And you will do this without suffering any loss.
Finally, savings allow you to take more calculated risks, from avoiding FOMO when investing to avoiding panic selling during market downtowns. If you have enough emergency savings, you won't be inclined to invest blindly and will be able to withstand volatility.
A sinking fund is a strategic way of putting a small amount of money aside to finance a specific purchase in the future. It's a prudent method of planning for big purchases and saving for significant life events.
Through this type of savings, you can be able to avoid debt and stay motivated to achieve your short-term financial goals. By saving for big purchases through a sinking fund, you can extend the purchasing window, stay on top of your other financial goals, and leave zero dents in your finances.
Committing to a saving schedule is the best way to change your bad spending habits. Savings accounts offer different features that can nurture you to develop a saving culture to help you get in control of your finances and plan for the future.
Some of these features include:
Investing is the foolproof method of making your money work for you. If you want to get the best out of your money, investing is the perfect way of doing it.
Here are five reasons why you need to invest.
To preserve the purchasing power of your money, you need to generate returns that surpass the inflation rate. In January 2023, Kenya's annual inflation rate stood at 9%. The rate is lower than the APY most banks offer. If the return you generate from your savings doesn't keep up with inflation, you are essentially losing money.
Investing helps prevent this by promising higher returns that exceed the inflation rate. However, it's important to remember the risk involved when choosing a particular investment instrument and invest for longer periods to help you withstand volatility.
Investments can supplement your income by offering you dividends, interest, rent, and profits. If you want to increase your total monthly income, many income-generating investment vehicles offer that. Savings only offer interest.
Some income-generating investments include bonds, securities, money market accounts, Saccos, and dividend-paying stocks.
Planning for long-term goals such as buying a house or retirement takes time. While you can achieve this through savings, it will take time, and there's the inflation risk discussed above to worry about.
Investing allows you to achieve those goals faster. For example, if you want to retire early, you need to create new income streams that will ensure you are financially independent, and you can only achieve this through investing.
To build wealth, you need to double your money significantly faster through compounding. Using the rule of 72, you can tell how quickly you will build wealth when saving or investing.
Putting your money in a savings account offering 8% pa interest will take 9 years to double your money. If you put the same money in an investment promising 13% annual returns, you'll double your money in 5.67 years. The higher returns you get from investing allow you to build wealth faster.
Investing allows you to reach financial independence, a point where you are generating enough passive income not to rely on a paycheck. Once you achieve this goal, you can start thinking of leaving a legacy and generational wealth.
If you make the right type of investments today, they can generate income long after your demise. Your heirs can inherit the investment and pass it down, ensuring that future generations reap the benefits of your sweat.
Saving and investing serve different purposes, and both are equally important. To achieve stability now and build a bright financial future for yourself, you'll need to save and invest simultaneously. But don't do it blindly.
Consider these seven things when making your decision:
Also Read: 10 Rules of Making Money You Should Know
Saving and investing serves two distinct yet important functions. At any given point, you need to do both. Therefore, you must learn how to balance saving and investing money to achieve your short- and long-term financial goals.
Now that you understand how their functions compare, you can create a checklist and decide which one you should prioritise.