Saving vs Investing – Risk vs Reward

    • Melissa Chapman
  • Investing
saving vs investing calculations

Taking the time to understand key financial terms with regards to the unique rewards and risks that go along with them, can help you make informed decisions regarding your income, so hopefully, you won’t ever need to get a quick cash loan.

Depending on your individual needs, saving or investing your money can act as a catalyst that could potentially provide long-term financial freedom.

Saving

Saving refers to unspent income that you put aside each month, normally with the help of a savings account. Having a savings account in place is almost second nature to individuals who desire a financial shield that guards against difficult or unexpected financial situations.

However, few people actually know the true benefits and risks associated with having a savings account and what type of financial goals it would benefit.

If you have short-term financial goals that can be accomplished without large sums of money then a savings account will be the best solution for you. Having goals that you want to achieve in two years or less makes you a perfect candidate for either a fixed deposit account or an easy access savings account.

Fixed deposit accounts offer a higher interest rate, but your funds will usually remain untouchable for the fixed amount of time agreed with your chosen financial institution. If you wish to withdraw those funds you may have to wait several months to gain access or be prepared to pay a penalty fee if you require access right away.

Easy access savings accounts will allow you to withdraw your savings when you need them, but they do not give you the same financial rewards that more permanent saving agreements provide. The interest gained on easy access saving accounts largely depends on the monthly balance of that account and the funds generally only take a few minutes to draw.

Rewards of a Savings Account

  • You have a short-term solution for smaller financial goals.
  • It helps to keep your savings separate from your income account which allows you to monitor growth and motivates you to save more.
  • In most cases, you can connect your savings account to your current account which allows easy access to savings.

Risks of a Savings Account

  • Savings accounts often offer low-interest rates. This means you run the risk of getting a poor return on your investment.
  • You can risk losing your money if the annual bank charges are higher than the interest amount you earn.

Investing

Investing your money means you are putting a certain amount of capital to work by purchasing assets or company shares. As the company you invest in grows, you earn a certain amount of profit that is entirely dependent on the number of shares you bought.

By investing in funds, assets, bonds, or shares you are aiming to walk away with more money than you initially put in. Some investment funds allow you to contribute regularly to your investment portfolio by paying monthly funds that provide financial security for you or a loved one’s future.

Your stock investments can either be managed by a financial advisor, or you can opt to manage them yourself. Seeing as these types of investments are dependent on the growth of a company or certain financial markets, there are no guarantees to the return on your investment.

If you are fairly new to investing in stocks or bonds, then it is best to trust your financial advisor to help you navigate your way between financial landmines.

Investing money is usually the perfect solution for bigger, long-term goals such as a retirement or college education fund.

However, gaining access to your investment is not as easy as withdrawing money from a savings account. Retirement funds will not pay out until you retire, and selling assets or market shares may be quite difficult if the company you invested in is not making a profit.

Rewards in Investing

  • Investing capital can potentially yield a bigger return on your investment than a normal savings account.
  • You can achieve big financial goals that have a lasting impact on you or a loved one’s life.
  • Successful investments can give you the capital you need to invest in other companies. This gives you a wider reach and more security if one of your investments doesn’t make a profit.

Risks in Investing

  • You have no guarantee of a good return on your financial investment. Unfortunately, this means you can lose some or all of your capital.
  • You can wait a substantial amount of time to gain access to money in an investment fund.

When it comes to saving or investing hard-earned income it is important to take into account what your goals are and to recognise which financial plan will meet those goals head-on.

It may be a good idea to discuss your unique situation with a financial advisor to ensure you get expert advice that will contribute to a secure financial future for you and your family.