It’s always a wise decision to keep money aside for the future. Even though it isn’t always an easy one.
It becomes even more difficult when you have to choose between saving money or investing it.
The best way to fully understand what saving and investing both are and how they are different is to look at them this way:
Saving is putting money aside for a short-term goal or a long-term goal.
Investing is putting money in an asset or venture with the intention of making more money as that asset or venture grows.
While saving and investing involves the accumulation of money, they both carry different risks and rewards.
It is important to know the difference between saving and investing. It is how you know when to save and when to invest. It is how you can get the best out of your income and it is essential to building a solid financial foundation
Both saving and investing are a crucial part of personal finance and any money management strategy.
Whether you save money in a wooden box or in a savings account, your intention is to set aside cash for a future time.
The money in your savings account is money you can easily access through a withdrawal or a bank transfer. This means that the money is liquid since you can easily obtain it in case of an emergency.
However, money in your Nigerian savings account gains a small interest of around 1% - 4% per annum depending on your bank. It doesn’t make a savings account an investment.
Saving money can seem less risky than investing but if you consider inflation (in Nigeria). Then you’ll understand that every naira saved today is likely to lose value tomorrow.
Investing on the other hand means your money isn’t easily accessible as you have purchased assets with the intention of generating more income at a later time. So if you want to withdraw money from your investments you’ll have to sell a portion of it.
The different types of investments can include stocks, real estate, mutual funds and even crypto.
Although investing can be more profitable than saving, it has a greater risk attached to it. You can lose money in a stock if it goes down or in a property if there’s a disaster.
When you should Save or Invest your Money
Neither option is necessarily better than the other, as it all depends on what your needs are. Depending on how much money you have, your expenses, and when you may need those extra funds, will help you decide whether you should save or invest.
Here are some questions to ask yourself:
Do you have an emergency fund?
Many experts don’t recommend investing unless you have some money already saved in an emergency fund. So if you don’t already have at least three to six months worth of expenses in savings, you should begin there to help offset the risk of investing.
- What are your short-term financial goals?
If you intend to make a major purchase like a car or a house in a few months or a year, then putting money in a savings account seems like the thing to do. Since you can easily withdraw your money.
- What are your long term goals?
If you want to significantly increase your wealth in the next 5-10 years. Then putting a portion of your income into investment vehicles is how you’ll do it.
If you’re in debt. You need to consider the interest rates of your loan before you save or invest anything. You need to compare the interest rate on your loan against the average returns for your savings and investments. Atimes you can lose money investing or saving rather than paying away from your debt.
At the end of the day, only you can decide whether saving or investing is right for your current situation. So carefully consider your options.
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