Saving vs investing; which is which?
A lot of people think the two terms mean the same thing. But they don’t. They may even have different effects on your finances. Saving can help you pay for unexpected events and huge expenses while investing is your avenue to building wealth.
For instance, putting the rest of your remaining money after paying expenses in a bank account that’s saving. But, if you take part of your income and buy bonds, stocks, real estate, or any asset, that’s investing.
When it comes to financial success, saving and investing can change your life! Even if you earn little, these habits can improve your finances over time.
Saving refers to putting away a part of your income for a future purpose. Most people save by making deposits in bank or SACCO FOSA accounts.
There are various ways of saving money:
Traditional Savings Account
Bank accounts allow you to keep your cash safe without exposing you to high risks. Consider whether you want a current bank account or a fixed deposit account when opening a bank account. The current bank account gives you quick access to your money, but most current does not earn you any interest. For those that do, it is usually too low.
Fixed deposit accounts are where you earn some interest by fixing your money for a particular period. However, you can not withdraw your money within this period without attracting a penalty.
High-Yield Savings Accounts
A high yield account typically offers more interest than a traditional account. You can get this service from online banks. Since you cannot walk into a physical bank office to make deposits, you can fund it directly from your bank account. However, online banks lack the personal touch of a walk-in bank.
Another option for a high yield savings account is through the SACCOs, as most of these offer a higher return and a lower risk. But, ensure you do your due diligence before committing your hard-earned money to any SACCO. Some are conning schemes dressed as legit institutions and will soon drown your savings.
Learn more in a related post: Thinking of Joining a Kenyan SACCO in 2021? These Are My 4 Top Picks
Certificate of Deposit
A Certificate of deposit (CD) is another financial product offered by banks. It is a time deposit, where you agree to keep your money with the bank for a specified period. A CD often gives a higher interest yield than savings accounts. However, think carefully before purchasing one. If you have to access your money before the agreed time, the bank will charge a penalty.
More On Saving
Low-income earners often find saving difficult. First, ask yourself, Do I earn enough? If yes, look at ways to reduce your expenses and put that money into savings.
Also, I understand that times are hard, with incomes remaining the same while living costs increase. If there’s nothing else to cut from your expenses, maybe it is time to get an extra source of income. Learning a new skill, getting more education, or take on a side hustle can help you make more money. A higher-income would allow you to save more money.
Remember, the goal is to have multiple revenue streams for you to achieve some financial freedom.
Related post: The 7 Income Streams You Should Consider Having
Before investing, build up your emergency fund. Your emergency stash should be able to cover your living expenses for three months. If you borrow during hard times, interests from such debts may compound and ruin your credit score. Remember, a poor credit score is bad for your finances.
Saving over a long period has some drawbacks. While your money remains intact in your bank account, inflation may reduce the value of your savings. For instance, a savings accounts in Kenya gives you a return of 7%, and the inflation rate is 4.5%. That means your net return is 2.5% (7% – 4.5%). See, you lose most of your return to inflation.
For money to maintain its purchasing power, it has to yield returns at the same rate as inflation. So with the above example, you need to make a total return of at least 10% of your returns to beat the inflation effect.
Inflation is an enemy to your savings. To beat it, you have to invest.
There is a saying that you earn, spend, save, and invest. That means, you first need savings before you start investing. Investing is a high risk, and you need to be okay with losing the capital. So, save first, then use the reminder for investing.
Investing also means putting away money for future use. The difference is that when you invest, you take on more risk in exchange for higher returns. Thus, even though some forms of investments are safer than others, all investments carry a measure of risk.
Real estate, stocks, bonds, and precious metals like gold are all forms of investment.
Stocks can give you great returns over the long term. However, some experts believe when you purchase stocks, you should hold them for a minimum of 5 years.
Before you invest in stocks, ensure you have enough cash saved up to meet any emergency. In addition, the stock market can be volatile. If you fall into hard times while your money is locked in stocks, you may have to sell at a loss. This loss would hurt your finances.
If you are young, real estate is a good investment for you. You may even take a long-term loan to finance your purchase. Approach your bank to see what options are available to you. Lenders generally ask for between 5% – 20% as a down payment. Therefore, you can make this a savings target.
Rental properties can give you passive income. For example, you can buy a multi-unit rental property and live in a unit while renting the others out. The rents you receive from the property can pay for your mortgage and maintenance. You can even make a profit. Over time, the property may get a higher valuation, resulting in capital gains for you.
If you want to invest in real estate and don’t know how to go about it or do not have the capital to buy properties, consider investing in a Real Estate Investment Trust (REIT). REITs run like mutual funds. They have managers who oversee all the assets in the trust.
Real estate funds pay dividends to investors.
Bonds do not give the best returns, but they are a safe way to invest. When you purchase bonds, you become a lender to the issuing institution. Therefore, you are entitled to interests until the bond matures.
Bonds include financial instruments like municipal bonds, corporate bonds, treasuries, and other forms of debt. They work best when you hold them to maturity. If you try to retrieve your money before the bond matures, you will pay penalties.
Related read: How to Invest in Kenya Government Securities
Would you like to own stocks but do not want to manage your investment yourself? Then, mutual funds are the best for you. Professional managers at the fund can help you beat inflation and grow your wealth.
Mutual funds may charge fees that eat into your profits. If you are concerned about the charges, consider purchasing index funds or ETFs. An index fund diversifies your investment across the entire market. You also pay lesser fees.
If you already have a retirement account, it might already expose you to the stock market. However, consider other forms of investment, like investing in foreign markets. Always remember to diversify!
Factors like your personal circumstances, how much you have, your financial goals, and your age should influence your choice of investment and savings. The right mix of saving and investing can improve your finances.
However, before you commit to any form of investment, speak to a financial adviser. They will take an expert look at your financial situation and give you sound financial advice.
Here’s why You Need a Financial Advisor