By Tsitsi Hatendi-Matika, Head of Retail Investment Specialist, Absa Wealth and Investment Management
Everyone knows they have to save, but should everyone be investing, and what is the difference?
Saving is putting money aside over a period of time, typically into a bank account, for future needs and wants. This carries nominal returns. Investing is the process of using your money with the aim of making it grow, by using vehicles like the stock market, bonds, currencies, physical assets like property, commodities or guaranteed products like endowments or a five-year annuity. Savings do not have any risk of losing money, whereas with investing there is.
Saving is disposable income that isn’t allocated to expenses which is put aside for emergencies, usually into a savings account, pension fund or cash. This helps to ensure financial security and puts you in a financially secure position to avoid debt. It is the first step towards the formation of wealth.
The amount you can save depends on your levels of income – if you don’t earn much, this reduces your capacity to save. At the same time, high expenses can make it difficult to have disposable income even if you earn well. So it is essential to strike a balance. It is possible that someone just starting out in their career could save more than someone who has recently gotten married, bought a house or started a family. But this is no excuse – it is crucial to save at every step of your financial journey, from your first day of work until you retire. Even R100 a month will grow to become a bigger amount through compound interest.
Savings can simply be for a holiday, or an emergency like illness or a car accident. This money should be liquid, quickly accessible with no penalties for withdrawals. Your bigger goal should be to generate returns by investing the money you have saved into vehicles that can give you a return. Given that you are now putting your money into other instruments and hoping for a capital return and formation, the risk is much higher compared to saving – but the rewards can be much greater. However, the argument of high risk, high returns has been challenged in recent years.
How one allocates their investments is a personal choice depending on circumstances and life stage. An investor’s risk profile, age, stage of life and what one is saving for will be taken into account by a financial adviser or broker, as well as the term you want to invest for and your appetite for risk. The investment landscape is complex, and can be affected by markets, changes in global political landscapes or local fundamentals.
Saving is about protecting your money and investing is about growing it. It is said that it is not a person’s ability to save that encourages him to save money, but the willingness to save forces him to do so.
