We all know how challenging the times are. So if you have a well-paying job, it is wise to manage your finances properly and plan for the future. Better still, no matter how much you earn as an entrepreneur or worker, always endeavour to set aside some money for future needs. This money could be in the form of savings, investments, or both. Only a vision-less person would consume all of his/her earnings without thinking of the future.
But is there any difference between savings and investments? It is quite common for people to view the two terms as the same. Both savings and investments are financial plans. But there are significant differences. The basic differences between them involves the level of risk in each case, and the goal of each one.
However, it is strongly recommended that you have BOTH savings and investment. Also note that your savings are the starting point for creating investment plans for yourself. An investment is intended to bring a greater return or yield on your money than savings can, on the long run. Let’s understand what each concept truly means.
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Savings vs Investment: Definitions
Savings is that part of a person’s income which he/she sets aside (regularly) for future needs, especially urgent needs that may arise. You may choose to keep your savings at home, for instance in a piggy bank or safe. Otherwise, you can open a savings account with a commercial bank, a co-operative bank, a microfinance bank, a credit union, or a post office. This is in a bid to further secure your funds from distasteful events such as theft, pest attack or a disaster.
In essence, opening a savings account is useful to preserve your money for short-term goals. These include paying of household bills, rent, school fees and more.
There are generally six types of savings accounts. They include:
Traditional savings accounts. They have the lowest interest rates, or annual percentage yield (APY). You can also open one with a small minimum deposit amount.
High-yield savings accounts. These are savings accounts with higher annual percentage yield than the traditional savings account. They are usually online bank accounts. To deposit money physically into it, or access the account through an ATM may not be possible.
This type of account combines a traditional savings account (or high-yield savings account) with the benefit of issuing cheques from it. You can easily access your account with an ATM card, and get a higher interest yield on it.
Certificates of deposit (or deposit accounts) are savings accounts that require the depositor to agree to leave his/her money untouched for a set period of time. At the end of that period, the money is said to ‘mature’ and can be withdrawn long with the interest in it. Alternatively, the depositor can repeat the procedure all over again – save it for another set period.
The set period for such deposit accounts could range from between 30 days to 60 months. Should the depositor request to withdraw the money before the maturity date, he/she must pay an early withdrawal penalty.
Cash management accounts. These types of savings accounts allow you to save money you intend to invest eventually into a retirement savings account or a brokerage account. They can also combine the features of both a cheque-issuing account and a savings account with a fairly high interest yield.
Specialty savings accounts. These types of savings accounts are set up to achieve specific goals, or for specific persons. Common examples include retirement savings accounts, education savings accounts or healthcare savings.
Investment is creating additional wealth or income from your existing funds. It involves putting your money into special financial products to earn more profit, rather than allowing your funds to lie idle. Aside from getting higher rewards from your investment, it also allows you to plan for long-term goals. The general dividing line between long-term and short-term is a matter of six to seven years.
Investments target the reaping of significant profit on your capital beyond seven years. So you are not expected to tamper with the invested money before the maturity date.
There are ten well-known types of investments which include:
Stocks (or equities/shares).
Stocks or shares are a way of buying into the ownership of a company that is listed publicly on a stock exchange. Such a buyer is called a shareholder. A shareholder can choose to sell his stocks or shares when the value rises in the stock market.
A mutual fund is a collection (or pool) of funds from several investors. The pooled money is then invested into some target companies, especially companies projected to have good returns on investment. Mutual funds are handled by private investment fund managers.
A bond is a loan offered to another entity. It could be to the government or a business organization. You buy a bond for a specific period of time to receive interest on your money (at intervals) during the lending period. When the bond matures, you get back your initial capital.
Certificate of Deposit
A certificate of deposit is issued to you when you save/deposit an amount of money with a bank for a specific period to gain interest. During this time, the account owner is not expected to access the money. And at the end of that period, he/she gets paid both the initial capital and the interest accrued on it.
Exchange-Traded Funds. These are similar to mutual funds. They are a pooled set of investments that can be bought and sold at the stock market. And their values are based on a monitored market index that changes during the day. That is, the market index moves up and down during the day’s trading period.
Annuities. An annuity is an insurance package or policy you buy, for which you receive periodic payments in later years.
Options. An option is an advanced way of buying a stock. The buyer targets selling or buying his/her stock at a given price and at a specific time in order to make profit. It is rather risky, as the chances of a loss are ever present.
Retirement plan. This is an investment account set aside as your retirement benefit. It comes with tax waivers (that is, you are not required to pay taxes on it when you withdraw your money).
Commodities. A commodity is a physical product you choose to invest in. These include energy products, metals, agricultural produce and more. You buy and sell these commodities in future markets in the form of bonds, stocks, mutual funds or futures contracts.
Derivatives. A derivative is a contract between two entities, in which the buyer agrees to sell an asset at a specific price later on a future date. That is with the hope that the value/price of the asset will not fall lower than expected.
Differences Between Savings and Investment
Very low risk
Medium to High risk
Covers short-term goals and needs
Covers long-term goals and needs
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