July is National Savings Month, and the focus is on making your money work for you!
Saving and investing are two strategies that you can use to reach your financial goals. The terms are often used interchangeably, but that’s a mistake because there are some key differences between the two.
Saving is putting your money away in a safe place to use for emergencies or for spending in the near future; investing is buying assets or exposing your money to the market over a long period of time, with the expectation that the capital value will grow.
Understanding the difference will help you decide the best strategy to use to achieve your goals.
When do you need it?
Before you do anything, you need to look at the time horizon of your financial goals. “Time horizon” is a fancy term that basically means how soon you’ll need the money: a short-term goal is generally less than three years; long-term is anything more than that.
Savings are used for short-term financial goals, like making sure you have a deposit to put down on a car at the end of the year. Investments, on the other hand, can help you reach longer-term goals like living comfortably in retirement or paying for your children’s university education.
Risk and reward
Another key difference between saving and investing is being able to access your money. Because a savings account is for short-term goals, you typically want easy and fast access. Investments, however, often have built-in restriction periods. You might not be able to withdraw your money, but you’ll also benefit from compound growth over an extended period.
It all comes down to risk and return. When you’re saving, you should choose a reputable product like a money market account, which will give you access to your cash within 48 hours. Growth within the account is not a priority, but it should at least beat inflation, otherwise you’d be better off with your cash under your mattress!
Investing is more complex. Because of the extended time horizon, the investment can be exposed to greater risk. The market might rise and fall, but if you choose wisely and wait long enough, you should be guaranteed a decent return. It’s always best to seek advice from a financial advisor when it comes to investments — there are thousands of products on the market and each person’s long-term goals are different.
You need to save and you need to invest. And for both, the sooner you start, the better!
The first step is to nail down your financial goals — what you need now, what you might need in five years’ time, and what you hope to have when you’re old and grey. Then use a budgeting tool like 22seven to streamline your monthly accounts and put every spare cent away. Your future self will thank you!