Saving vs investing: a comprehensive guide

What are the differences between saving and investing?

Saving and investing differ in several ways, even though people save or invest with similar goals, e.g., to accumulate cash to use later on. Investing is putting money into the likes of financial schemes, company shares, bonds, property, or commercial ventures with the expectation of a return on investment (ROI), i.e. profit. Investing can be done by individuals, or on a larger scale by wealth managers, hedge funds, private equity firms, etc.

While investors may realise ROI, they might also end up getting back less than their initial outlay, or even lose it all. In the case of company bankruptcies, for example, the share price goes down to zero (essentially making shares worthless) – eligibility for pay-outs from asset liquidation depends on the class of shares owned.

There are some ways in which investors can mitigate risk. These include diversifying their portfolios. Diversifying a portfolio is investing in a number of distinct opportunities – this is often done to mitigate risking your entire capital in one or a few investments.

Saving, on the other hand, is putting money away through an official scheme, usually via a bank account. With saving, your money’s nominal value is protected, plus you earn income in the form of interest at a certain rate. You may want to save money for a variety of reasons; for example, to afford a mortgage deposit to buy a house.

So, the main difference between investing and saving is the potential to realise returns that are much more than said interest; but this trade-off comes with exposing yourself to the possibility of losing money (with investing).

Advantages of investing

• Earn a profit: the most obvious benefit is exiting an investment with more cash than you started with, which is the typical aim with investment activity
• Protect your money against inflation: inflation erodes the value of the cash that you hold. Leaving your cash in a regular savings account means that the bank will pay you interest on your funds at a rate of about 1% to 4.5%. This means that when inflation is high, the real value of your money is low. Investing offers the potential to receive a return that’s higher than this, therefore protecting you (somewhat) against inflation
• Save time and effort: in some instances, not much time and maintenance are needed to invest. When investing in stocks, for instance, you can buy and hold with the aim to profit over the long term
• Find your preferences: with a wide range of assets within the stocks and exchange traded fund (ETF) markets you can choose what works best for you
• Mitigate risk efficiently: investing offers ways of managing your risk's flexibility. We empower investors of all experience levels to understand their appetite and aversion to risk

Disadvantages of investing

• Possibility of losing money: investing isn’t a guaranteed way to make profit – with any investment there’s an inherent risk that your position may lose money, possibly the entire initial outlay. You can use technical and fundamental analysis to help you increase your probability of success, while mitigating risks as far as possible
• Investments are typically held for a long time: investing usually means buying and holding an asset – i.e. direct ownership – for an extended period. This can be challenging as it requires discipline, coupled with a degree of risk in some situations, to not exit an investment at the wrong time

Advantages of savings

• Low risk of loss: when saving money, there’s low risk that you’ll incur a loss.
• Clearly defined gain from interest: savings accounts offer you interest for holding your money with a bank or other financial institution. This means each year you get a guaranteed return on your savings

Disadvantages of saving

• Loss of purchasing power with inflation: the value of your money is eroded by inflation; meaning that as time passes (and prices increase), you’re able to afford less and less with the money you have
• Low returns: you can expect to earn a small amount on your money saved through interest (offered by your savings account provider), but this is likely to be minimal. Comparatively, the return on savings is usually lower than the returns on investments over longer term

Tips for growing a savings account

• Set goals: understand what you’re trying to achieve by saving. It may be that you want to put away $100 a month, or $1000 a year
• Understand your finances on a broader spectrum: by taking stock of your incoming and outgoing funds you’re in a better position to find out how much you can save; and therefore, how feasible your goals are and how long it’ll take to reach them
• Cut costs in everyday life: this can be anything from spending less than $20 a month on a particular item, to cancelling unused subscriptions. Be smarter when making purchases; do you really need that new jacket/watch/oat milk latte?

Is it worth investing?

Yes, investing is worth it if you have disposable income that you can afford to put away for an extended period. Many people around the world supplement their income with investments. Some investments are used to save for retirement. The sky’s the limit if you think you have what it takes to make some shrewd financial decisions.

Ultimately, choosing to invest or save (or both) boils down your unique circumstances, your goals, and if you’re feeling ready to get started. But remember that risk is involved – you could incur a loss instead of benefitting from the potential for reward.

How much should one invest?

There’s no way of quantifying this value, unfortunately. What’s important to understand is that the more money you’re able to invest, the more potential returns you can generate. However, you must remember that as much as there’s a chance to make a profit, it’s also possible to incur a loss on your capital.