Saving vs Investing- what is best for me?
More than ever before thanks to the rise of Cryptocurrency like bitcoin and ETFs the age-old debate rages on in the finance world; should I be saving or investing? Each serves a different purpose and offers several advantages and disadvantages. Whether you're just starting out or looking to grow your wealth, understanding these choices is important.
In this blog post, we'll take a look into the pros and cons of investing versus saving and help you have more of an understanding of the choice that will work best for you.
What is Saving?
Saving is the consistency of setting aside a portion of your income regularly rather than spending it all. This money is typically deposited into a savings account, where it accrues interest over time. In Australia, savings accounts are offered by banks and other financial institutions, each with varying interest rates and terms.
Pros of Saving
Safety and Security: Savings accounts in Australia are covered by the Financial Claims Scheme, which protects deposits up to $250,000 per account holder per institution. This cover is set up to allow your savings are safe even if the bank fails.
Quick and Easy Accessibility: Savings accounts offer you immediate access to your money, something which some investments don’t allow. This easy access makes savings accounts ideal for short-term financial goals or emergency withdrawals.
Stable Returns: Interest rates on savings accounts can fluctuate with economic conditions and monetary policy but generally they do provide a stable and consistent return for their users. This reliability is reassuring for people who want to know what they will regularly be receiving each month/have a low-risk tolerance to rate spikes with their money.
Cons of Saving
Lower Returns: The interest rates on savings accounts are often lower than the rate of inflation, which means that over time, the purchasing power of your savings may decrease. For instance, if inflation is 2% per year and your savings account earns interest at 1%, you are effectively losing value on your money.
Opportunity Cost: By keeping your money in a savings account, you may miss out on potentially higher returns available through investing in other assets such as stocks, bonds, or property. Over the long term, this opportunity cost can impact your ability to build wealth significantly.
What is Investing?
Investing involves putting money into assets with the expectation of generating income or profit. This can include stocks, bonds, property, and other financial instruments that have the potential for higher returns over the long term.
Pros of Investing
Higher Returns: Historically, investments have shown higher returns compared to savings accounts, helping your money grow faster.
Beating Inflation: Investments have the potential to outpace inflation, preserving and increasing your purchasing power.
Diversification: Investing allows you to diversify your portfolio across different asset classes, reducing overall risk.
Cons of Investing
Risk of Loss: Investments can be volatile, with the possibility of losing money in the short term depending on market fluctuations.
Lack of Accessibility: Some investments may have restrictions on when you can access your money without penalties.
Complexity: Understanding different investment options and strategies requires time, knowledge, and sometimes professional advice.
Should I Start Saving or Investing?
If you're new to financial management, it is best to start with building a savings buffer. Aim to save enough to cover at least three to six months' worth of your living expenses in a high-interest savings account. This emergency fund will provide you with a level of financial security and peace of mind.
Moving to Investing
Once you have a sufficient emergency fund, you can consider investing for long-term goals like retirement or to simply build your wealth. It’s best to begin with low-risk options such as index funds or managed funds, which offer diversification and professional management.
Balancing Saving and Investing
For many Australians, a balanced approach combining saving and investing is the perfect mix. You can easily split your funds based on your financial goals, risk tolerance, and the time you want to put into it. Regularly review and adjust your strategy as your circumstances change.
Summary
In summary, saving and investing serve different purposes in financial planning. Savings help with security, while investing can offer you higher returns over a longer period of time. The key is to understand your financial goals, risk tolerance, and time to make informed decisions. Whether you're starting with saving or wanting to begin in investing, each step contributes to building a stronger financial future.
Mastering these both of these concepts allows you to feel confident in making the correct choices with your finances, this confidence ensures your money works best for you.
Here at the GLOSS Vault, we have made it our mission to help as many people like you across Australia feel in control of your money and ensure you’re getting the most out of it. To find out more about us and what we do click here. If you’d like to see our app in action for yourself head here!