Saving vs investing - what’s the difference?

Sometimes the words ‘saving’ and ‘investing’ are used to describe the same thing, and although they’re both important parts of our financial resilience and wellbeing, we need to understand their differences.

Saving and investing can both provide a way of getting where you want to go, they just take different routes to get there.

Saving

Saving is putting aside money regularly for the future, usually in a bank account.

Having savings gives us financial freedom so we have choices later. Savings can help us achieve short and longer-term financial goals. Short-term savings might be for a holiday or buying a new phone while longer-term savings might involve putting money away for a deposit on a house.

Saving can also help with our mental wellbeing. Studies show that people with savings are less likely to worry about money, be less impulsive, can resist temptations, and are therefore less likely to get into money troubles.

Savings are generally low-risk and while saving your money is ‘safe’, the down-side is the interest you earn from a savings account or term deposit is often low. It’s also important to note that in these times of rising inflation, your savings won’t give you the same purchasing power as they used to.

Tips for saving

It may sound counter-intuitive, but every time you get paid, pay yourself first.

Paying yourself first doesn’t mean ignoring all your bills and other expenses. You need to have a budget of your incomings and outgoings, and when you’ve sorted that out, you’ll know how much is left and how much you can save every pay.

The best idea is to start small at first - even saving small amounts will make a big difference over time and help you get ahead.

Paying yourself first works best when:

• it’s a regular habit (set up an automatic payment for each pay day); and

• you have your savings in a separate account or even a different bank.

Make sure your savings account is earning the highest interest and charging the lowest fees possible.

Investing

Investing is putting your money into things like stocks, funds and bonds, to grow your money over time and reach long-term financial goals.

You can use savings to make investments, but unlike savings investing involves some risk to achieve growth or a regular stream of income.

Because investing involves taking risk, you should always do your homework. Choose investments that align with your goals, risk tolerance, and timeframe (longer-term investments can ride out the ups and downs of the stock market).

While there are plenty of online platforms (eg. Sharesies, Hatch) that provide a way to invest with smaller amounts of money, it is worthwhile seeking expert advice for larger investments.

It’s important to remember that investing comes with no guarantees – there’s always the risk of losing money.

Tips for investing

Set clear, realistic investment goals:

• Know your ‘why’ - what you’re trying to achieve, what’s your purpose, what will investing help you accomplish?

• Know your ‘when’ – how long do you want to invest for?

What is a comfortable balance between risk and return for you?

• Higher returns = greater risk. Higher risk investments have the potential to grow more money over the longer term but can be stressful over the short term.

• Search online for an investor profiler tool to help gauge your attitude towards risk and determine the type of investor you are.

Find an asset mix that suits you

The asset mix that suits you will depend on the type of investor you are. A mix of different kinds of investments such as shares, bonds, property, cash or managed funds will provide different results.

Diversifying your investments, that is having investments in a variety of companies, industries and geographic locations around the world, helps smooth the market ups and downs, and is one of the best ways to reduce your risks.

Key points

• Saving money means storing it safely so that it’s available when you need it - it has a low risk of losing value, but lower returns.

• Investment comes with risk, but the potential for higher returns.

• Investing is typically longer-term, such as for retirement.

• Both saving and investing are key to your financial wellbeing and resilience. Whether you’re putting away some savings for the first time or are ready to start investing, make sure you do your homework and ask lots of questions first.