Huge difference between saving and investing
While saving is a great for putting money away for a specific goal, investing over the long term offers growth in interest and in your actual capital investment.
Back in the early 2000s, the Post Bank released a TV advert that remains one of my favourite. It featured a young boy Thabo, who wanted to lobola and marry Mr. Mofokeng’s daughter, Thandi. (Mr. Mofokeng was also the teller at the boy’s local Post Bank.)
Thabo acknowledged that he did not immediately have six cows and so he committed to paying Mr. Mofokeng in monthly lots until he reached his target at the age of 20.
The punchline of this short and clever ad was that it didn’t matter how young you are, where you come from or how tiny your savings ability is, anyone can open an account at the Post Bank.
As I grew older and started learning about the vast opportunities that are available to help make your money work for you, it started to become obvious that Thabo could have made better use of his resources.
Specifically, understanding the difference between saving and investing would have allowed Thabo to reach his goals much quicker.
In our communities, when most people talk about putting money away for the purpose of growing it for future use, they are referring to savings.
Saving money can be described as delaying spending today by buying savings products whose benefit you will enjoy tomorrow. The growth in your savings come largely in the form of the interest that you earn.
While saving is a great exercise in helping you put money away for a specific goal, the majority of savings accounts and savings plans are inadequate in meeting all your future needs and aspirations. The areas in which savings are a great resource include:
- Emergency fund: Saving for a rainy day is a wise discipline to have and instill in all members of your household. Experts typically suggest you accumulate between three and six months’ worth your salary in a rainy-day account.
- Short-term goals: If you are planning to use the money within the next 12 months, then putting it away into a savings account may be a sensible decision.
Investing, on the other hand, is different from savings for the following main reasons:
- Timing: The key difference between investing and saving is that investing tends to have a long-term horizon, while saving is typically for the short-term.
- Risk: The interest growth in savings accounts is, for the most part, guaranteed by the financial institution providing the account. On the other hand, investing offers growth in the form of interest growth as well as growth in the actual capital that you allocate for investing. With the benefit of this higher reward, though, comes greater risk and uncertainty, particularly in the short-term.
- Saving is like going to a cattle farmer and receiving only the calves that are birthed in the group (e.g. interest rate in your bank savings account). Investing is like owning a piece of the cattle farm (e.g. buying a share of the bank via the JSE). In the short term, it may be better to only receive the benefit of calves and not having to worry about everything else that goes into operating a cattle farm. In the long term, however, owning the farm means that your financial benefit comes in the form of land appreciation, milk sales, trading of cows and bulls as well as the profits that arise from selling calves.
If we place Thabo’s strategy under the microscope, it becomes obvious that the goal that he was saving for was well into the future, meaning that he was able to take on more risk by investing the money instead of simply saving it.
- Siwundla holds the Financial Manager Risk qualification and is the investor relations and product analyst at CoreShares