Saving vs. Investing: The Differences, Pros, and Cons

They say that to be successful, you have to save money. Is it still relevant, though? Times have changed and saving alone is not enough to tick off your bucket list. To survive in this era, you need to master the art of money management: saving, investing, and trading – which we will cover in a different article, so stay tuned.

 

Unfortunately, they don’t really teach saving and investing at school. The good news is, we are here to guide you through so that you are clear what are the pros and cons of saving versus investing, the differences, and what products or instruments are available for you to choose.

Understanding saving

The purpose of saving is to allocate a certain amount of money and put it aside to cover your needs. For example, you save 30% of your income for groceries and commuting. Saving money is practically harmless. The amount of money you put into your savings account remains the same over time, unless you withdraw it.

 

Saving does have its own risk, however, especially in the long run. Although you receive interest from the bank, it is not enough to keep up with the inflation. Singaporean banks’ interest ranges between 0.05% p.a. and 0.30% p.a., while the country’s inflation rate is around 0.5% – 2% annually. If you depend solely on saving, your money will decrease in value over the years.

 

Saving is good for short-term goals like buying a new pair of shoes, paying for an online course, or planning a holiday. But when you talk about longer-term financial goals, investing might be a better answer.

Understanding investing

When you invest, you put some amount of money into an investment product with the hope that the value will increase overtime. The increase in value is known as interest, return, or profit.

 

Investments offer higher returns than bank interest – up to 18% p.a.! This enables you to reach your goals faster with the same amount of money. So, why don’t we just ditch saving and go all-out with investing? That is because investing typically has higher risks than saving.

 

The financial market has its ups and downs, and all investment products are affected by it to some extent. When the market is low, the money you have invested will decrease in value. On the other hand, your money will increase in value when the market goes up, and you can realize your profits by withdrawing money.

 

Investing can be a good choice if you want to grow your money. The higher returns may also be a solution to beat inflation. You can also invest to achieve longer-term goals like buying a car, for business capital, or for your retirement fund.

 

Pros and cons of saving and investing

 

  Pros Cons
Saving The amount of money remains stable, low risk Money doesn’t grow, low return/interest
Great for short-term goals Might decrease in value as the inflation rate increases each year
Investing Money can potentially grow, higher return/interest High risk, the value of money depends on the market condition
Great for long-term goals Less liquid, might need to hold when the market is bearish

 

 

Saving instruments and investment products

Other than savings accounts, you can also utilize saving instruments such as deposits and government bonds to save your money. All banks offer certificates of deposit. This is where you put in a certain amount of money and agree to hold it for a certain period of time, in exchange for a higher, fixed interest.

 

Meanwhile, bonds are issued by the government. They offer higher interest rates than deposits and potential capital gain. Although the term is a lot longer than deposits – up to twenty years – you are allowed to withdraw your money before the term ends and receive potential profit or loss.

 

Now on to the investments. Today, there are numerous ways to invest and grow your money. You can buy safe assets like gold and accumulate them. Or if you’re more aggressive, you can buy stocks or digital currency.

 

If you think traditional instruments like gold and stocks aren’t your thing, you can try P2P lending through digital platforms like Minterest. At Minterest, you can lend your money to trusted, selected borrowers that range from consumer loans to invoice financing, and earn interest up to 18% p.a.

 

The verdict

Both saving and investing are equally important to succeed. We say it is important to do both in order to cover short-term and long-term financial goals, as well as to mitigate the risks.

 

Here’s an extra money management tip from us. Before thinking about investing, you should first be a master at budgeting. You also need to pay off your debts and save for an emergency fund. Then, and only then, will you have achieved a healthy financial condition and are in a safe state to start investing. Check your financial health for free here and have fun managing your money!

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Shaun Tan

Loan Executive

With 6 years of financial planning experience, Shaun has helped many individual and corporate clients achieve their goals. 

Shaun is passionate about life and adventure, and is a licensed divemaster who enjoys bringing the joy of the underwater world to others.