There are a lot of questions you will come across in the personal finance journey that you will pity two things against each other. Savings account or current account? Investing in good health or investing in good health insurance. You’ll get a few more of these and one of the most popular ones is whether you should save money or invest money. Some people will advocate for one or the other, others don’t know the difference between the two after all the money stays with you. If you’ve ever been asked or pondered the question yourself and needed an answer join me as I navigate the question of whether you should save or invest.
I suppose defining the two is the best place to start and we will start with saving. And this is where it gets a little tricky. By all accounts and definitions save for the economics one which I will go through a little later, saving represents the excess or surplus that remains from income after all expenditure is taken care of. The Mirriam Webster definition of “to put aside money” is the one that we are looking for here. So saving is the act of putting away money. Saving implies therefore taking little to no risk with your money. After all, if I put away $100 it would kind of be pointless for me to come back to $20. Many would argue that I was better off spending the money and getting its full value. This brings us to what investing is.
Investing has many long winding definitions and I’m not a fan of long winding definitions especially where they create more questions than answers. Let’s again go with the Mirriam Webster definition which states that investing is the act of committing money to earn a financial return. This implies that there is growth expected in the money wherever we choose to put it. Our $100, were it invested instead of saved is expected to be $120 or $150 a year down the line. Of course, investing is a simple concept but the outcomes are not that simple. What I mean by this is there is risk involved in investing. While growth is the desired outcome your money is also at risk.
The similarities and differences
So clearly saving and investing have the same goal, you keep the money perhaps for later use or deployment. This is where I run into a school of thought derived from economics that says saving is equal to investment. This isn’t accurate. That economics definition pertains to countries, it is macroeconomics which measures nationwide finances and in that case money saved by some individuals is expressly or implicitly invested in other individuals projects. You, my friend, are not an economy. The big difference between saving and investing is in the expectations for the money. Saving puts the money aside for later use while investing seeks to grow the money but accepts the risk that this may not work out.
Pros and cons
Saving shifts money from times of surplus to times of deficit. This comes in handy if you experience a shock to your income or unexpected expenditure comes up. Saving also gives you funds referred to as savings which you can use to take advantage of opportunities that arise to grow your money, known as investments. The downside of saving and what makes it unattractive is that your money doesn’t grow, where it does it grows very little.
Where saving is unattractive investing is downright sexy! You put in money today and a few years down the line it grows. Boom! What more could you want? Well, the full story would be nice. Survivor bias is the tale of the hunter, the focus on the winners in a story that has many losers. Investing is risky and doing it right takes a lot. The number of options in investing and whether to do it long or short term doesn’t help either.
The question demands an answer, should you save or invest? My opinion is you need to do both. Saving is essential as we have noted emergencies may befall you and the last thing you want to do is to draw from your investment to fund the gap. That’s if your investment works out, it’s feasible there may be no money available when you need it most. So you need to have both savings and investments; your life circumstances will tell you which to focus on more.