Savings and investing are both an essential part of our personal finance plan. They both help us make our financial goals come true, and you can’t have one without the other. Both investing and savings are related to money saved for future use.
However, if you compare investing and savings, you will find certain differences between them. Both come with their advantages and disadvantages and have certain characteristics.
But before we proceed with exploring why investing is better than saving, let’s understand what investing and savings are.
What is investing?
Investing is putting money in an asset that has the potential to generate income or appreciate in the future. Hence, investing means making your money work for you by letting it grow into more than what you invested.
An investment could be anything like stocks, bonds, property, business, etc., which can generate cash flow for you down the road.
The returns you get from investing depend on the type of investments you choose. For example, your return will be given through dividends or capital appreciation (i.e., increase/rise in stock price) when you invest in stocks.
Whereas, when you buy bonds or peer-to-peer lending investments like Lending Club Notes, the returns you get are generated through periodic interest payments.
What is savings?
Savings are part of your personal finance plan that helps you put money aside for emergencies or fund future projects. For example, when you want to buy a house in three or five years, savings can be used to meet the down payment for the home.
In simple words, savings means putting aside some money from your income for future use.
Whether you are saving for a short-term goal or long-term savings goals, savings play a very important role in making all your financial goals come true.
Why should you invest and not rely on savings?
Investing is a way of growing your hard-earned money so that you can have a promising future for yourself and your family. It’s a long-term process that requires patience and research on your part, but the results are worth it.
On the other hand, relying on savings alone is not a good idea as they don’t give you the same amount of return on your money compared to investing.
Even if a few risks are involved, investing is still better than relying on savings because you will reap the benefits of your money working for you. It will give you more money after retirement if done correctly.
Regular savings do not guarantee a good return, whereas investing can!
Here are some of the main reasons why investing works better than relying on savings:
1. Higher returns:
If we only consider stocks, you can easily get 12-15% returns each year. On the other hand, if you put your money in a savings account, then the best interest rate that you will get is around 0.5%. We don’t know about you, but we will take 12-15% over 0.5% anytime, any day.
2. Tax benefits:
Certain investments, such as retirement plans, can offer you tax exemptions. You can take full advantage of this and invest your money in such plans so that you don’t have to pay any taxes on your investments. On the other hand, the interest you earn on your savings is taxable.
3. Compounding effect:
The compounding effect is a magical thing that will help you grow your money much faster than what you can save from your monthly salary.
The power of compounding means that the returns you get on your investments each year will accumulate and create their own returns so that they can give you better returns in the future. Learn more about compound interest.
Although there is a compounding interest effect on savings, it is very meager that you won’t even notice the difference.
4. A passive source of income:
The best thing about investing is that it can help you earn a passive source of income for yourself. If you have done your research properly and built a diversified portfolio, there are chances that you will get higher returns on your investments each month. That will be more than enough to cover your monthly or weekly expenses, depending on the size of your investment.
Savings don’t generate any significant return since the interest rate is insignificant. So you will hardly benefit from a passive income stream if you rely on savings.
5. Outperforms inflation:
It’s a known fact that inflation can eat up the value of your savings very quickly. For example, if you have $100 in your hand today, it may only be able to give you $75 worth of goods in about 15 years. But investing can help you protect yourself against such losses by giving you better returns on your money.
6. Provides a legacy:
Investing your money in the right places can help you build a legacy for your next generation. You can set up a college fund for your children and pay their tuition fees from your returns from investing each year.
Savings, on the other hand, doesn’t have this legacy effect.
As you can tell by now, investing is better than relying on savings. You can improve your financial situation in the long run if you invest your money wisely. Although you can get a good return on your investment, you should also know that investing has advantages and disadvantages.
However, you must educate yourself about different investment opportunities before making any big decisions regarding your investments.