A simple guide to differentiate between savings and investments

Have you ever wondered why the $1000 you had five years ago is no longer worth the same value in 2022? I understand the feeling because we are all in this together. For example, the cost of feeding a family of four in the United States is no longer the same as it costs in past years. The situation is worse in developing countries like Nigeria, where most citizens struggle to feed themselves because of inflation.

Savings is a good idea, but building an investment portfolio is the next step after savings. Suppose you want to secure your future and live your dream life after retirement. Investment can generate higher returns than savings and help you actualize those dreams. Are you confused about whether to save or invest the extra money lying dormant in your account? Let me guide you through making the right financial decision to end financial struggle and open the door for eternal financial breakthrough.

What is savings?

Savings is the act of setting money aside for future unforeseen expenses. It is the money set aside after meeting every day-to-day expense. It is the first step to living a financially disciplined and independent life. Bank saving accounts or fixed deposit accounts are popular savings options that anyone can adopt. Cash at hand is another option, but it is risky and prone to theft. As a result, saving a substantial sum of money at home is not advisable.

The primary aim of savings is to meet certain financial obligations, save for capital-intensive purchases or make an individual less at risk in case of financial emergencies. There is an old belief that saving money can make you wealthy. But, no, savings is just the difference between your income and expenses.

What is investing?

Investing means buying assets with the hope of earning significant returns over time and multiplying wealth after that. But, unfortunately, as sweet as the return on investment is, so is the risk involved. It is said that "the higher the risk, the higher the returns and vice versa.

Investment is an excellent way of increasing and building generational wealth. However, investment is a long-term process that requires a good knowledge of the financial market and the assets you can invest. If you are scared of investing in the financial market, you can adopt the old way of our parents and grandparents by investing in real estate and gold, but they are mostly expensive compared to buying shares.

Investing is allocating a portion of savings towards acquiring assets to create long-term wealth. Therefore, the best way to be free from financial bondage is to merge savings with investment to build and create lifetime wealth. Let me teach you five vital differences between savings and investment that will allow you to make the right decision that will lead to your financial freedom.

Differences between saving and investing.

Most people confuse saving and investment as the same thing, but they are both excellent steps to building financial freedom. However, they play different roles in your financial strategy and the statement of financial position. Every individual needs to know when to save and invest.

Risks

Savings in the bank account are zero or low risk. The chances of losing your funds are low because the Federal Deposit Insurance Corporation (FDIC) insures funds in savings accounts for up to $250,000 per depositor. But with investment, the reverse is the case. The risk of losing part or all of your investment is imminent. The outcome of your investment is dependent on the financial market situation.

Returns

Compared to investment, the return on savings is relatively low. On the other hand, investment has a very high return considering the high risk involved. Although not all investments are the same, some are low risk, low returns, while some are high risk, but generally, the higher the risk, the higher the returns.

Time

Savings are for meeting the short-term and smaller financial objectives like buying a mobile phone, saving for emergencies, purchasing home appliances, etc. Consider savings if you intend to achieve a goal within six months to 3 years. But investment is the best option if you are looking for a longer period. People invest money in capital projects, children's education, and retirement. If you don't need the money in the next three years, consider investing it in a minimal risk inclined investment.

Access to money (Liquidity)

Money in savings comes in handy in times of emergency. You can easily convert your savings to cash because you have all the access to your savings account and can quickly meet urgent and pressing needs. On the other hand, you can decide to withdraw part or all of your money, which can lead to unnecessary withdrawal and spending. While with investment, the case is different. Access to your money is dependent on the type of investment. Some investments allow withdrawal of funds at any time, while some do not allow withdrawal until the expiration of the investment duration.

Inflation

Money in savings is usually affected by inflation because of its low or zero interest rates. In contrast, money in an investment is not much affected because of the interests that will accumulate over a long period. If you have some dormant money and don't want inflation to affect the value, you should consider investing such money.

Goals and Objectives

The primary aim is to meet urgent expenses, while investment creates wealth, meets long-term capital goals, and appreciates. Therefore, you must consider the goal before deciding to save or invest. Is it to meet emergency expenses or create more wealth? Knowledge of this will guide you.

Knowledge is not required.

Anybody can save money. All you need is to open a bank account under a bank registered and regulated by the relevant law and financial regulatory bodies. But investment is time-consuming to understand, and keeping records and track of investment is stressful, except if you want to employ a private wealth management firm to manage your investment. It is still advisable to know the financial market and how it operates.

When to move from savings to investments?

As stated earlier, Savings refers to leftover funds after meeting all necessary expenses. Therefore, savings means a net surplus of funds for an individual or family after paying all expenses and meeting relevant obligations.

While investment uses surplus funds to create or generate more wealth for investors, it is using excess money to grow wealth by investing in financial assets such as stocks, property, or shares in a mutual fund that might increase in value.

Having some cash on hand for emergencies is essential. However, how much money can one keep in the bank or cash without earning a return? Therefore, when individual cash is in surplus, one should begin channeling parts of the savings to investments and make returns to meet future financial goals.

Investing is good, but investors should be ready for the risk before embarking on the investment journey, but if you can't bear the risk, stick with savings. Investing is personal to each person. Each person has their own set of goals and aspirations in life. As a result, they each have different schedules for saving and investing. As a result, no investment advice specifies the appropriate age or timing to begin investing.