Is it better to save money or to invest it? The correct answer is that it depends. You need to know the differences between saving and investing. Bartosz Grejner, Cinkciarz.pl analyst explains the pros and cons of these activities.
Both saving and investing should be a crucial part of the financial aspect of everybody’s life. Saving is when you save money and don’t spend it. Your main target is to protect the loss of your capital, as well as suppressing the urge to spend it. You also have free access to your capital when you are saving.
Taking under consideration the current possibilities, the temptation to spend money is large. You shouldn’t expect large profits from bank account rates or bank deposits. You should treat this as a price for the best possible security for your funds.
On the other hand, investment means that you want a portion of your capital to be multiplied. This is why the most common investment tools are shares, investment funds, real estate, etc. People expect the value of these to increase. Before you choose your investment tool, you should also define your investment target, as well as the length of the investment. The length is crucial due to the risk of a decrease in estimated investment profits. In general, your investment targets should not be short-term, and we’ll cover that shortly.
Is saving safe or even necessary?
The short-term goals are the domain of saving. We save for a rainy day or to make a small (a washing machine) or a larger (first mortgage installment) purchase. A common quality of both of these goals is that you won’t likely lose any capital.
Risk is one of the most crucial aspects of saving, as well as of investing. When saving, you mainly choose short-term targets. This is the opposite in the case of investments, where the shorter the term, the larger the risk. Even though the risk that your bank would become insolvent is small, it still exists. Here we can mention another advantage of saving, which is the guarantee given by the Bank Guarantee Fund. It will refund you 100% of your funds in each case that the amount is not higher than 100.000 euro.
What happens when the amount is higher? All you need to do is to open accounts in several banks, in which the deposits do not exceed 100.000 euro. That way you can be 100% sure that your capital will remain safe. However, you have to keep in mind that only individual accounts, deposits and receivables are subject to guarantee. Meanwhile, bank offers also consist of many products that are not subject to the Bank Guarantee Fund’s guarantee (investment funds units, for example).
How to save?
Another matter is how to save. It might be helpful to comprehend the basics of the account interest. Even though we often see interest being given per annum, banks usually charge interest for shorter periods (months, for example). This means that it’s more profitable to make a payment once a month, even if that amount is small. This is because larger amounts are working for us every month.
You need to be aware that saving does not multiply your assets significantly. You only keep bearing interest on your assets for a specific purpose. Each quality of savings (high level of security combined with a guarantee of capital, quick access to your money, interest that protects money from inflation), most often “cost” you the loss of the possibility to significantly multiply your capital. However, you shouldn’t treat this as a con, but as an element of your capital protection strategy.
In what cases is investing useful?
One advantage that investing has and saving has not, is the possibility of multiplying your capital. Just as it was mentioned before, you must know your goal and assumed length of your investment. This is significant, because investing is related to larger risk than saving is – a risk of losing a portion of your capital, or its entirety in extreme cases. What can you do to decrease this risk?
The investment’s length should not be short. Why? Because investments are most often related to the capital market or economy. They mostly move in cycles of a few years, having their ups and downs. It’s difficult enough for economists to foresee them, so it would be wise to assume that it won’t be easier for you. You can safely assume that these cycles may last for approximately seven years. This is also the minimum length of an investment. This way, you take the risk of investing at a bad time to the minimum.
Fluctuations of business cycles or in financial markets are less significant in the long-term. However, you can also not be certain that you won’t lose a portion of your capital. It’s for the best to choose more than one investment product. This way, you would diversify your investment wallet, as well as decrease your risk. You only need to keep in mind that your investment products can’t be strongly related.
This can be presented easily on the example of investment funds. They are managed by people too. Each management team will react differently to the market events, as well as make different mistakes. Therefore, if you really want to invest in equity funds, you will decrease risk by selecting not only three similar funds, but funds that are managed by different people. Keep in mind that your choice should be based on a deep analysis, especially in the context of positive results’ recurrence.
Right balance
Everybody has different needs, to which the strategy of saving or investing should apply. Your strategy will be different when you’re in your twenties and when you’re in your sixties. However, we can identify a few basic needs that would apply to the majority of people.
When you decide that you are able to save a certain amount of money regularly, the first rational stage should be gathering savings, which are at the level of a few monthly salaries. This would be your personal fund in case of unexpected expenses or a temporary unemployment.
Afterwards, you may think about your short-term, as well as long-term targets. The majority of people have both kinds of targets. Therefore, your strategy should consist of saving and investing elements. By integrating them with your needs, you increase your chances of building your wealth in a stable fashion.