Remember when you were young, and your parents would tell you the fable of ants saving up food crumbs for rainy days?
At that age, you already knew to save your allowance in case you needed materials for your art project, or just wanted to treat yourself to ice cream. Your parents and teachers also taught you that saving would help you become rich.
However, your perspective changed when you grew up. The fable of the ants still holds true, but saving isn't enough. If you want to build your wealth, you need to make your money work for you—you need to invest and earn passive income!
It’s understandable that personal finance newbies and novice investors think saving and investing are the same. However, if you compare investment vs savings, they are two different concepts. Understanding both of them will help you map out your financial future.
Investment vs Savings: Key Similarities and Differences
So what's the difference between saving and investing, and why should you save and invest?
Saving, in essence, is the act of setting aside money for expenses, unforeseen needs, and emergencies. Since you can withdraw money quickly from your bank account, saving allows you to be ready for anything life may bring.
You can also use your savings for long-term goals, such as raising funds for a home down payment, a small business, major life changes such as weddings and pregnancies, education, and retirement. There's no risk involved in saving unless you misuse the money.
Investing is also an act of setting aside money for the future. However, it's still different since you’re putting your money in places where it could grow bigger, such as stocks, bonds, mutual funds, dollar accounts, and real estate properties.
Think of it as 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.
Similar to saving, the yields or profits of investments are also used for long-term plans, such as your child's college education, 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 Saving
Saving comes with many benefits. For one, 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 going to Japan next year or buying an expensive handbag within the next six months, saving up is a more practical option.
This has its downsides, though. Inflation causes your money’s value to decrease. While the bank may offer interest rates, these menial amounts can't battle inflation.
The Pros and Cons of Investing
Investing should be part of your healthy financial lifestyle, as it gives your money the chance to grow bigger than it could in savings. If the economic outlook is good, expect great returns.
However, there are risks, such as local and global economic activities, the performance of the fund managers or brokers, and the reputation of the companies or businesses you invested in. These can affect the prices of stocks, mutual funds, and bonds. You might sustain losses.
This is worrisome, especially if you’re an active trader or someone just looking to reap short-term benefits. But if you don't plan to touch the money in your investment accounts in the next five years or so, you can expect things to change eventually. Your money can grow again.
It’s also worth noting that investments aren't liquid, meaning you can't 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?
To save or to invest—that is the question. It's quite easy to answer, though.
You just have to understand the nature of your goals and their timelines. If your goal is to secure 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. Keep your money in accounts with low or no risks at all, such as bank accounts.
However, if want wads of cash to travel around the world by the time you turn 60, putting your money in high-yield yet high-risk instruments, such as stocks and mutual funds, may be worth the gamble.
Read more: Best Investments For Every Risk Appetite
How Much Should I Invest vs Save?
Saving is the foundation of your financial wellness, so it should always come first. Most likely, the money you'll use for your investments will come from your savings. Rule of thumb when it comes to savings: you should have enough to cover your personal expenses, such as mortgage, food, utilities, and insurance.
You should save for an emergency fund worth at least your salary for six months. Through this, you have enough in case you lose your job or your family needs sudden financial support. To further protect yourself, get health insurance.
Investments come in only when you've already saved enough. You should be fine with potentially losing the money you put into investing.
If you’re testing the waters, try to set aside as little as ₱1,000 for investing. Increase it gradually once you get the hang of investing.
Read more: 7 Smart Investments for Your 13th Month Pay
Where to Invest Your Money
Now that we've tackled the topic of investment vs savings, you might be thinking of where to invest your money. There are many investment companies to choose from, but first, you need to understand 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. When you buy a stock, you own a share of that corporation.
You can either make money by selling it or wait for its value to rise in the coming years. You can also 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 money to a company or the government for a specific period of time. You can make money through the fixed interest rate. When the bond matures, you'll get your money back.
Real Estate
Real estate properties, such as house and lots, condominiums, and 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
- Your Options for the Best Investment in the Philippines
- Don’t Fall for These Investment Scams in the Philippines
Final Thoughts
Remember that investment vs savings are two different things, although there are some overlaps. However, their objectives are both the same—to make sure you're always ready for the future. Both are also essential for building a financially healthy lifestyle.
Think about your risk tolerance and the nature of your goals. This will help you determine whether to save or invest.
Source: [1] 10 Online Brokers in the Philippines with a Minimum Investment of P5,000 or Lower (Esquire Philippines, 2020)
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