Saving or investing: Is there a difference?

SSL in the Money

Shanta Lorde

Wednesday, December 14, 2016    

NEW YORK, United States — A Christmas tree and holiday decorations are viewed outside the New York Stock Exchange on December 8, 2016 in New York. (Photo: AFP)

We sometimes use “saving” and “investing” interchangeably as we engage in our everyday conversations. It is a known fact that money doesn’t grow on trees. We therefore have to save and invest wisely to secure our financial well-being.

The first step we take is to understand the difference between saving and investing; this will help in working toward your financial goals for you and your family.

Point to note: We save for the short term — we invest for our future.

SAVING

Savings consist of money put aside in a safe place where you can access funds at any time you choose. Our most popular savings products are savings accounts, chequing accounts and term deposits. A portion of funds in these accounts may be insured by Jamaica Deposit Insurance Corporation. The question one would now ask is: why not just save and invest in these products?

Let us take a look into our day to day financial lives:

We receive our long awaited salary, we know our regular monthly bills need to be paid such as instalment loans, credit cards, grocery and utility bills, to name a few. We realise that there is room left to put aside some cash in our deposit account as a source of emergency funds. Some people aim for a deposit account with a balance of at least six times their salary in the event of loss of employment.

How ‘safe’ is money left in our savings account for long periods, with interest received not keeping up with inflation?

A whole chicken can be bought for $1,000 today, but in a few years the $1,000 will only be able to purchase half of a chicken.

The opportunity cost for leaving cash in a deposit account for long periods of time — for security and funds readily available — is low returns on savings. There is also a strong likelihood that such returns will not keep pace with inflation (increase in the price of goods and a fall in purchasing value of money). This is why we put a portion of our money in deposit accounts for short-term needs, and invest the difference so that our money can gain increased returns for long-term goals. The latter is termed investing.

INVESTING

“Financial investment is an asset that you put money into with the hope that it will grow or appreciate into a larger sum of money. The idea is that you can later sell it at a higher price or earn money on it while you own it.”

When we speak of investing, there is a common saying that goes with it: “Don’t put all your eggs in one basket.”

The benefit exists where you stand to earn greater by diversifying your investment portfolio. By diversifying we do not mean going to different financial institutions to have them invest your money on your behalf. You can choose to diversify your investment portfolio through one financial institution. This institution acts as a brokerage for you and is able to invest your funds locally and/or internationally, across different asset classes and different companies and different regions with one aim in mind: to provide you with maximum returns while reducing the risk of losing your investment.

OVERCOMING FEARS OF INVESTING

Here are a few rules of thumb to provide peace of mind on the matter of investing, by increasing the likelihood of reaping real returns on your investment:

1. Invest early — Investing is about increasing your returns over time. The market tends to trend upward over time. The earlier you start, the more time you have for your money to grow.
2. Investing is a steady, committed process — Make it a regular habit to invest on a regular basis and watch your investments grow more quickly and steadily over time.
3. Diversify — The most effective way of making your money grow is diversifying your portfolio. A diverse portfolio minimises the risk of losing your money in a volatile market.
4. Avoid acting on impulse — The most important factor of investment is time. Being focused on your long-term objectives is the key to success. Do not allow the short-term trend of the market to distract you from your goals. The market recovers over time.

Shanta Lorde is a sales manager trainee at Stocks & Securities Ltd.