The difference between saving and investing

There’s no denying it. Everyone needs money to survive. Like it or not, this is the reality we’re living in today. Be it for shelter, for food, for healthcare, for clothing, to pay for utility bills, rent – money has become a central part of our everyday lives. Whether we live a luxury lifestyle or whether we live the simplest of lives, money is really what makes us get through the day, the week, the month, the year.

The money we earn in terms of salaries and wages is what the average person depends on to get by every month. Some have excess cash at the end of the month; others unfortunately do not have that luxury and struggle to make ends meet. But for those who manage to put aside some money at the end of the month, they have 3 options; spend it, save it or invest it, meaning deterring consumption in the future.

Spending is the easiest, but saving and investing involves an element of discipline. Saving and investing are not one and the same and it is important for us to know the key differences. Savings, generally in the form of monies held at banks or in deposits bear low risk and are relatively liquid, the purpose of which is to have/utilise that money put aside for a specific purpose within a short time frame. Investments on the other hand are used for the preservation and/or creation of additional wealth, monies which are not required by individuals in the immediate term. Investments generally involve a greater element of risk but the expected return on investments is larger than that on savings.

Savings are either monies set aside to caster for the one off, out of the blue expenses, and can be treated as an emergency fund. Home improvements, family holidays, car expenses, schooling are all examples of what money set aside for savings are generally used for.

On the other hand, investments generally involve larger cash outlays, into more risky less liquid (this cannot be generalised however) investment vehicles, such as investments in; collective investment schemes, pension funds and investment in a new business venture, to name just a few.

This does not mean that money put aside for savings are risk-free. One needs to appreciate also that placing money at banks also includes an element of risk as we depend on the financial strength of the savings banks to provide us with our hard-earned savings, on call, when we required. It must be reminded that we have had bank defaults in the past.

The inherent difference between investing and savings is quite simple; it all boils down to time horizons. If you need the money put aside in the near future, then save it. If you do not envisage the need to use that money for a long period of time, invest it. The crux of it all is identifying this time frame. Investing for a period shorter than 3 to 4 years might not necessarily be a wise idea, especially when investing in capital markets as investors will not be capturing the full circle of economic cycles and the benefits of investing might not necessarily be reaped in such a short time frame.