A healthy financial plan requires saving and investing and it is important to know how they differ. Putting some money aside in a savings account is good for providing a safety net and achieving short-term goals, while investing may provide higher long-term returns and should create wealth and income over time. Here we explain the difference and the pros and cons of saving and investing.
Saving
Saving is a straightforward process which involves depositing a lump sum and contributing regular amounts over time. Savings accounts tend to have a stable rate of return and you can withdraw money if you need it. Saving is a good habit to get into and a great one to teach your kids early! Saving carries less risk than investing and usually creates less wealth than investing, particularly in a low interest rate environment.
Saving is great for short-term bigger ticket items
Saving is good for
If you have a short-term goal such as a home deposit, taking the family on an overseas holiday or paying for a big event such as a wedding, saving is a good discipline. It is certainly preferable to chocking up the credit card and creating debt.
Putting some money aside for a ‘rainy day’ protects you against unexpected financial emergencies such as medical bills or damages to your car.
If the deadline for achieving your goal is five years or less, saving is a safer choice than investing.
Investing
With investing you use cash to buy assets that should increase in value and provide an income over the longer term. Such assets may include managed portfolios, shares, fixed interest investments, property, superannuation, or account-based pensions. Due to fluctuations in the investment market this approach will always carry some risk. Taking a long-term approach and getting advice about what to invest in is wise when purchasing assets. Everyone’s circumstances, goals and tolerance for risk are different and should be considered when making a significant investment.
Investing can be a wealth creation strategy
Investing is good for
Buying a property or shares that you expect to appreciate and be able to sell at a profit is a good reason to invest. Real estate that earns a rental income should create profits after you pay your property expenses. Shares that produce dividends can create an income to pay other bills or purchase more stocks so that you can grow your portfolio.
Re-investing can be a powerful strategy as it creates compounding. This happens when your earnings start generating more earnings and can help to accelerate wealth creation.
Get advice
Both saving and investing are important aspects of financial planning. The right advice tailored to your circumstances will help you to reach your goals. If you would like to talk to one of our advisers, please get in touch.
General Advice Warning: The information provided in this article is general in nature and does not consider your particular investment objectives, financial situation, or insurance needs; we therefore recommend you seek advice tailored to your individual circumstances before making any specific decisions.
Dobbrick Financial Services (Gympie) Pty Ltd ABN 48 931 205 109 & DFS Oakland ABN 64 340 527 395 and their advisers are authorised representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. DFS (Ipswich) Pty Ltd ABN 86 100 184 521 and their advisers are authorised representatives of Fortnum Private Wealth LTD ABN 54139889535 AFSL 357306.
