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Are you just saving or building wealth?

Image: 123RF/tashatuvango

Recently I had meetings with potential clients where we were discussing the difference between savings and investments. In all my meetings there was a common understanding among clients that because they are putting money away they are "investing".

This could be the same understanding for most people. Savings is the portion of current income not spent on consumption. It can be slow and steady compared to investing, which is the purchase of assets with the goal of increasing future income.

Like one student said: "Investing is like an ocean, sometimes you catch good waves, other times they just roll out"; you must find a way out.

Many people have lump sums of money in a bank/savings account that is accumulating minimal interest instead on placing these lump sums in an investment platform. This platform will give an opportunity to get high returns which come with great risk, which is why you will need a well-diversified portfolio which will help spread your risk.

There are pros and cons on both savings and investments. Savings give you easy access at any given time which can be a challenge for people who are not disciplined as they might keep accessing it for unnecessary things. There are no fluctuations of the market and low risk, which means your capital is secured. Savings are for a rainy day; do you have at least three to six months' salary in your savings account? We cannot expect to build wealth by just putting money away in a savings account, that is why there are investments platforms that will help grow your wealth.

Investments are subject to market volatility which may affect the value of investment and have high risk with high return.

It can be for short, medium and long term.

You need to know and understand the types of investments which are called asset classes: equities (shares), bonds (fixed income), property and cash equivalents (cash in hand or money markets); these can be combined in building a balanced portfolio. Then you ask yourself: "What can I invest in?'' The answer to that is, it will depend on your risk appetite and your goal. Contact an investment expert or a financial adviser to help you diversify your portfolio.

One of the most common mistakes that people make is that they look at past performance and make a decision based on that, which is incorrect. You need to understand the objective of the fund you are investing in and your risk profile and make sure it is in line with your goals.

Remember when the first wave hits you (first hint of loss) do not rush to get out of the ocean, be patient, stick it out and you will enjoy the outcomes.

*Zaba is the owner of Tokoloho Financial Services, an insurance
brokerage. She is also the co-author of Save Invest Pros per and is an executive member of the Financial Services Intermediaries Network, working on a policy within the insurance industry.

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