What’s the difference between savings and investments?
A savings account is typically no-risk. You earn interest on the money you save; your initial capital is guaranteed and it’s more easily accessible if and when you need it. This type of account enables you to save money for a specific purpose, such as a dream holiday, within a short period of time.
Investments are aimed at wealth building. They involve greater risk, but also have the potential for higher returns than a regular savings account. Investing is the process of using your money to buy an asset that has a good probability of generating an acceptable rate of return over time, making you wealthier in the long-term. It makes sense to have a well-diversified portfolio that helps spread your risk – as well as the potential to deliver returns – across a wide range of investment classes. Some examples include stocks, bonds, unit trusts and direct investment in property or other assets.
SAVING VS INVESTING: THE PROS AND CONS
Both saving and investing come with pros and cons. Where you decide to put your money will depend on your reasons for wanting to grow it. Here are some of the most important elements of both to help you make decisions about which options are best for you:
The pros and cons of a savings account
- A savings account offers you easy accessibility to your money. A notice deposit protects your savings from impulsive withdrawals as you are required to provide notice of your intention to withdraw cash. A fixed deposit is a type of savings account that lets you choose the period of investment, offers a fixed interest rate for the full period of the investment, and also protects you from making withdrawals on a whim
- These types of savings accounts are low risk, as they are stable and don’t fluctuate with the stock market. While you may not enjoy the same levels of interest, you have the peace of mind of knowing your capital amount is secure, and how much interest your money will earn.
- Interest rates on savings accounts are lower than on more high-risk investments.
- Saving takes a lot of discipline and commitment. Easy access to your funds may lead to spending your savings on impulse buys. With longer-term investments such as unit trusts or a retirement annuity, you do not have easy access to your money.
Considerations for a savings account
Here are a few questions to ask yourself when opening a savings account:
What are your savings objectives?
These may include goals like:
- An emergency fund for rainy days
- A deposit for a car or house
- Saving for a holiday, new appliances or a car
- Short-term education costs, such as textbooks or sporting equipment
- Taking advantage of Tax-Free savings account options
What is your timeframe and tolerance for risk?
A savings account is a short- to medium-term savings option, with low risk. It has a low risk because your capital stays in the account and slowly earns interest.
Will you need to access the money?
With a savings account, you have access to your funds either immediately, or within an agreed timeframe, in case you need to withdraw the money for a specific purpose.
The pros and cons of an investment account
- Investment accounts typically provide the potential for greater returns than savings accounts, over longer periods of time.
- An investment account allows you to make decisions regarding how to allocate your funds in the account, based on your risk appetite, and your investment criteria.
- Investment accounts are subject to market volatility. The value of your investment can easily be affected by an economic crisis or market problems.
- There is the potential for loss of capital.
- Investments accounts are typically subject to higher fees.
- A minimum lump sum deposit or regular debit order is required for an investment account depending on the fund manager.
- The past performance of a fund doesn’t guarantee its future performance, which means you’ll need to weigh each fund according to the timeframe of your investment, your risk profile and the objectives of the investment.
Considerations for an investment account
Here are a few questions to ask yourself when taking out an investment account:
What are your investment objectives?
- Paying for your children’s education, such as high school or university costs
- Building a retirement fund
- Building future wealth
What is your timeframe and tolerance for risk?
Investments accounts typically require a medium- to long-term period of investment. The younger you are when you start investing, the more aggressive your strategy can be, because you’ve got plenty of time to ride out inevitable rough patches. As you get older, you will need to look at investments that are less risky and more conservative.
When will you need to access the money?
An investment is typically long-term, such as a retirement fund that is invested over decades. For more medium-term needs, such as paying for your child’s education, you can look at options that will allow you to withdraw the money when you need it.
If you’re unsure or need more information and advice, please speak to an accredited financial advisor.