Often we either hear or read of why it is important to open an interest-bearing deposit account at a bank. In some cases, it is why we have to invest in real estate or buy some shares in a company, or even stocks from the stock exchange. All the above are very important for financial freedom and wealth creation. However, amongst the two, one is better. In this article, we describe savings and investments; why it is important to do both, and the advantages and disadvantages of both financial terms.
Savings and Investments
Savings are described as the money an individual has left over after they deduct their consumer spending from their income over a particular period. It is the proportion of an individual’s (personal saving), company’s, or institution’s (retained profits) income that is not spent on current expenditure. Just like most financial terms, savings have different categories namely; emergency savings, long-term savings, spending savings, and goal savings.
Investments on the other hand are an asset or items gotten with the principal aim of generating income or appreciation. The main goal is to acquire the assets either a real estate property, bonds or stocks, and make money off its returns. This is where the popular term “ROI” (Return on Investment) comes from. Investments generally are categorized under two sections; growth-oriented investments and fixed-income investments. The type of investment an individual close to retirement will go for will be different from someone just starting a career.
Both savings and investments are key and important financial terms that must be present before you can achieve financial freedom. However, to answer the question that serves as the topic of this article, consider the pros and cons of the two terms below:
Advantages of Savings
Creating a savings account and saving part of your income has some benefits. Some of them are:
- With funds in your savings account, you cushion the effect of emergencies
- Job loss is always a traumatic experience, in some cases, because it is unexpected. However, your savings can help you get through before landing another job
- After working, you need to relax. This is where your savings come into play. You can create a savings account strictly for vacation purposes.
- With an IRA account, you have enough funds available for retirement, as saving a small portion of your income over a period accumulates.
Disadvantages of Savings
- Your savings account will be affected by a low-interest payout, Although the high yield savings account is a bit better, they don’t make much difference.
- Asides from getting low-interest rate on your money, it is also affected by inflation
- When you start saving, you develop this attitude that makes it difficult to spend money on things that are important to you. In some cases, some people cut back on food spending just to get a few bucks to save, making it detrimental to their health.
Advantages of Investments
- With investments, you get ahead of inflation. For example, the rate of inflation historically has averaged around 3%. When you invest and earn a rate of 7%, you are way ahead of inflation
- Investing will help you build wealth. “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”- Robert G. Allen
- With investing, you can make financial goals and meet them.
- When you invest in shares, there is an opportunity for capital growth, dividend income, flexibility, and control.
Disadvantages of Investments
Of the three-time horizons, investing can be the slowest way to make money.
Making investment decisions can be hard at times as you must be careful not to run into a loss
Which is Better?
We’ve discussed the benefits and downsides of both savings and investments. However, one way to use both is saving to invest. If you need to invest in a high-end investment, saving a small amount over a few months or a year; then putting the savings in an investment option can be a very good decision. However, if you want to build wealth, then investing is the best way to go.