To Invest or To Save: What Should I Do With My Money?

Published: December 16, 2020 | Updated: September 2, 2021 | Posted by: Moneymax | Personal Finance


Investments vs Savings | Moneymax

When you were young, the fable where ants were saving up food crumbs for the rainy days stuck with you. At that age, you already knew what to do with your allowance in case you need to buy materials for your art project or you just want to treat yourself to a cone of ice cream by the end of the school week. Your parents and even your teachers might have even taught you that saving up would help you become rich.

However, your perspective changed when you grew up. The fable of the ants still holds true, but the reminder of the adults from your younger years is quite far from reality. If you want to build your wealth, you are not supposed to just save. You need to make your money work for you – you need to invest!

It’s understandable that personal finance newbies and novice investors think of saving and investing as almost the same thing. However, if you compare investments vs savings, they are two different concepts and understanding both of them will help you map out your financial future.

Investments vs Savings

investments vs savings - differences

Saving, in essence, is the act of setting aside money for future expenses, unforeseen needs, and emergencies. It’s the money that you can withdraw quickly from your bank account. However, you can also use your savings for long-term goals, such as raising funds for a home down payment or building your capital for a small business. Practically, there is no risk involved in saving unless your expenditures are much bigger than your savings or you have misused the money.

Investing, on the other hand, is quite similar to saving, as it’s also an act of setting aside money for the future. However, it is still different since you’re putting your money in places where it could grow bigger, such as stocks, bonds, mutual funds, dollar accounts, and even real estate properties. Think of it like planting a seed and waiting for it to become a tree — though this means that it will take time before your investments yield profits. Moreover, you will also need to deal with a couple of risks here and there.

Generally, the yields or profits of investments are used for long-term plans, such as the college education of your child, retirement, business funds, and safety blanket against inflation.

Read more: Investments for Beginners: How to Find the Right Investment for You

The Pros and Cons of Savings

Saving comes with many benefits, and among them is that you have easy access to a reserve of cash whenever you need it. If you’re looking to reach a short-term goal within a specific time frame, such as a going on a holiday in Japan next year or buying an expensive handbag within the next six months, saving up is a more practical option.

This method of keeping money has its own share of downsides, though. Inflation causes your money’s value to decrease, and while the bank may offer interest rates, you have to admit that these can be menial and not even enough to battle inflation.

The Pros and Cons of Investing

Investing should be part of your healthy financial lifestyle, as it gives your money the chance or potential to grow much bigger than it could in savings. If the economic outlook is going to be good in the coming years, you may expect great returns.

However, there are many risks that you need to deal with, such as the local and global economic activities, the performance of the fund managers or brokers, and the reputation of the companies or businesses you have invested in. These can affect the prices of the stocks, mutual funds, and bonds, and you can possibly sustain losses. This can be worrisome, especially if you’re an active trader or someone who is just looking to reap short-term benefits. But if you’re not going to touch the money in your investment accounts in the next five years or so, you can expect that things will change and your money can grow again.

It’s also worth noting that investments are not liquid, meaning you cannot withdraw them easily in case you need cash. This is especially true when it comes to real estate properties.

This podcast talks about some of the most common questions that Filipinos have about investing and saving.

Should I save or invest?

investments vs savings - should i save or invest

To save or to invest – that is the question, although this is quite easy to answer. You just have to understand the nature of your goals and their timelines. If you’re goal is to have a down payment for a home, pay for grad school, or fund your wedding within the next three or five years, investing may not be the best idea. This is because you run the risk of losing money. It would be wise to keep your money in accounts with low or no risks at all, such as bank accounts.

However, if you’re looking to have wads of cash when you turn sixty or you want to travel the world when you retire, putting your money in high-yield yet high-risk instruments, such as stocks and mutual funds, may be worth the gamble.

How much should I keep in investments vs savings?

Saving is the foundation of your financial wellness, so it should always come first. Most likely, the money that you will use for your investments will come from your savings. The rule of thumb when it comes to savings is that they should be enough to cover your personal expenses, from home mortgage to food, utilities, and insurance.

An emergency fund that is worth your salary for six months should be a conservative range. Through this, you will have money that you can use in case you lose your job or someone in your family needs sudden financial support. To further protect yourself, you will need to get health insurance.

Your investments will only come in when you already have enough savings. The money that you put in investment should be something that you’re willing to lose. If you’re testing the waters, you can try to set aside as little as PHP 5,000. But you can gradually increase it when you get the hang of investing.

Read more: 7 Smart Investments for Your 13th Month Pay

Where to invest?

investments vs savings - where to invest money

Now that we’ve tackled the topic of investments vs savings, you might be thinking of the right investment. You already know that you can keep your money in a piggy bank or in your local bank, but you may ask where you should invest it. There are many investment companies to choose from, but you need to understand first their offerings. Here are some of the most basic forms of investments you may want to check out:

Stocks

A stock is a unit of ownership in a corporation. So when you buy a stock, you own a share of that corporation. You can make money by selling it or wait for its value to rise in the coming years. Also, you can earn income through dividends, which are cash or rewards that a company gives to its shareholders. You can directly buy stocks and pick companies to invest in through online platforms, such as First Metro, BPI Trade, COL Financial, and ALPHASEC[1].

Mutual Funds

Mutual funds refer to a pool of money collected from participating investors. A fund manager will then invest the collected money in different financial instruments, such as stocks, bonds, and other forms of equities. You can buy mutual funds through investment companies, such as Sunlife.

Bonds

Bonds are an investment instrument where you lend a money to a company or a government for a specific period of time. You can make money through the fixed rate of interest. When the bond matures, you will get your money back.

Real Estate

Real estate properties, such as house and lot, condominiums, and even agricultural lands, also make great investments, as their value tends to appreciate over the years.

Read more: Retirement Fund 101: Plan, Save and Invest for Early Retirement

Final Thoughts

Investments vs savings, which one is for you? Remember that saving and investing are two different things, although you have to acknowledge the fact that there are some overlaps. However, their objectives are both the same – to make sure that you are always ready for the future. Both are also essential for building a financially healthy lifestyle. If there’s one thing that you should know, it is the value of gauging your risk tolerance and the nature of your goals. This will help you determine if you are going to save or invest.

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Source: [1] 10 Online Brokers in the Philippines with a Minimum Investment of P5,000 or Lower (Ichimura, Esquire Philippines, 2020)