Saving & investing
Saving and investing both have a place in a financial plan, but they serve different purposes and come with different costs and risks. Learn how each works and what to consider when deciding.
In the previous lesson, you explored different ways people build wealth over time. Two of the most common ways people set money aside are saving and investing.
Understanding saving and investing in practice
Both approaches can play a role in a financial plan, but they’re often used for different types of goals and time horizons. Understanding how they work can help you think more clearly about where you might want to put money aside.
This lesson explains the general characteristics of saving and investing. It does not recommend one approach over the other. Remember that there are different costs and risks associated with investing as opposed to saving.
Different types of money for different goals
People often think about their money based on when they might need it. You may recognise these categories from previous lessons:
- Financial buffer – money for unexpected expenses
- Planned spending – holidays, purchases or short-term goals
- Long-term goals – retirement or building wealth over time
Saving | Investing | |
|---|---|---|
The value of your assets | Reasonably certain: usually remains stable | Reasonably uncertain: fluctuates between higher and lower |
Flexibility | High: You can usually access your money easily. | Lower: You may need to sell your investments before you can access your money. |
Time horizon | Short to medium term | Medium to long term |
Expected returns | Usually lower | Usually higher |
Risk | Lower | Higher, with the possibility of losing money |
Remember that investing involves different costs and risks to saving. You could lose some or all of your invested money.
Possible benefits and trade-offs when saving or investing
Both saving and investing involve trade-offs. Understanding these can help you decide what feels appropriate for your situation.
Saving | Investing | |
|---|---|---|
Commonly associated with: | ⚓ Stability 🔑 Easy access to money ⏱️ Predictability for planning | 🌱 Potential for long-term growth 🏔️ Opportunity to build wealth over time |
Trade-offs: | 🐢 Lower potential returns 🛒 Purchasing power may decrease over time due to inflation | 🎢 Value can rise or fall 🎲 Returns are uncertain ⚠️ You could lose some or all of your invested money |
Finding what fits your situation
Saving and investing can both play a role in your financial plan. Saving is generally seen as stable, because the value of your savings does not fluctuate, and flexible, because you can usually access your money easily. However, inflation can reduce the value of your savings over time. The return you earn on your savings in the form of interest is also usually quite low.
Investing is generally seen as a long-term approach, with the potential for higher expected returns. However, there is no certainty about the returns you will achieve, and the value of your investments will fluctuate over time. This means your investments can increase or decrease in value.
If you want to withdraw money from an investment account, you will usually need to sell your investments first. There is also always a possibility that you could lose some or all of the money you invest.
When deciding between saving and investing, it is important to consider more than just potential returns. Think about your time horizon, how certain you want to be about the amount you will have in the end, and how comfortable you are with taking risk. In practice, many people save and invest at the same time, using each for different financial goals.
Key takeaways
✓ | Saving and investing are often used for different types of goals |
✓ | Saving offers stability and accessibility, with lower potential returns |
✓ | Investing offers growth potential, but comes with uncertainty and the risk of losing money |
✓ | Time horizon and risk tolerance play an important role in decision-making |
Which statements describe characteristics that are commonly associated with saving?