Sav­ing and in­vest­ing: what’s the dif­fer­ence?

You can be some­one who saves dili­gently, yet you may never man­age to ac­cu­mu­late wealth. That’s be­cause there’s a dif­fer­ence be­tween sav­ing and in­vest­ing. You need to do both, writes An­gelique Ardé.

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Sav­ing is putting money aside for fu­ture use – or spend­ing post­poned – whereas in­vest­ing is what you do with money to earn a re­turn.

This is the view of Steven Nathan, the chief ex­ec­u­tive of 10X In­vest­ments, who says that these dif­fer­ent ac­tiv­i­ties are two sides of the same coin, and that it’s im­por­tant that you do both.

“When you save money for fu­ture use, you put money aside with a goal in mind: that may be your an­nual hol­i­day, your child’s univer­sity ed­u­ca­tion in five years’ time, or your re­tire­ment, still 30 years away,” Nathan ex­plains. Your ob­jec­tive is to pre­serve money.

When you in­vest, your ob­jec­tive is to earn a re­turn – which is to grow your money, he says.

If you hide your spare cash in a drawer, you are sav­ing, not in­vest­ing. Left alone, that money will not grow in amount or in value; it will lose value.

The con­stant rise in the cost of liv­ing – known as in­fla­tion – steadily eats away at the pur­chas­ing power of your money. De­posit­ing your money in the bank should at least pre­serve its pur­chas­ing power, but in such a sav­ings ve­hi­cle your money won’t grow suf­fi­ciently to pro­vide for your re­tire­ment, which is why you need to in­vest in as­sets that de­liver a high real (after-in­fla­tion) re­turn over time. A tried and tested way of do­ing this is in high­er­risk as­sets such as shares, which may prove volatile over the short term, but de­liver in­fla­tion-beat­ing re­turns over longer pe­ri­ods.

This is an im­por­tant mes­sage for peo­ple who are good savers but poor in­vestors.

Fi­nan­cial plan­ner Natasja Hart says she has come across such peo­ple, who have “saved them­selves poor” – mean­ing that they have failed to in­vest. “I’ve seen it with older peo­ple who tend to de­rive com­fort from hav­ing easy ac­cess to their money in the bank.” But left in the bank, their money has hardly grown and they have lost the op­por­tu­nity for gains to com­pound over time.

Nathan says that when you save your money as cash in the bank, the risk is gen­er­ally very low. “You there­fore earn a re­turn that, over long pe­ri­ods, ex­ceeds the in­fla­tion rate by only one per­cent a year. But you can be al­most 100-per­cent sure that when you draw your money, you will re­ceive all that you put in plus any in­ter­est that is due to you.”

Share prices, on the other hand, move daily. “You are thus never sure how much money you will re­ceive for your shares un­til the day you sell them. How­ever, to com­pen­sate for this un­cer­tainty, you are likely to earn a real re­turn of six to seven per­cent a year from a well-di­ver­si­fied share port­fo­lio that is held for many years.”

But how will real growth of six per­cent a year fund your re­tire­ment, you may ask. Nathan says that it works through the phe­nom­e­non called com­pound­ing.

“Say you de­posit the price of a loaf of bread to­day into an in­vest­ment ac­count that grows at five per­cent a year in real terms (six per­cent a year, net of an an­nual fee of one per­cent). After 15 years, your in­vest­ment should pay for two loaves of bread and after 40 years seven loaves.”

This is the ef­fect of com­pound­ing, or earn­ing a re­turn on your re­turn. The longer you in­vest, the stronger the com­pound­ing ef­fect be­comes.

Nathan says that the key les­son here is that you should start in­vest­ing as early as pos­si­ble, to ben­e­fit from the strong com­pound­ing ef­fect by the end of a long in­vest­ment term.

“If you in­vest your money in the bank, earn­ing a real re­turn of one per­cent a year, you will be able to buy only a loaf- and- a- half in 45 years’ time. In other words, even if you in­vest dili­gently over your en­tire work­ing life, in­vest­ing in a low-risk as­set class could cur­tail your stan­dard of liv­ing in re­tire­ment. That is a much big­ger risk than ex­pos­ing your money to the share mar­ket over the longterm,” Nathan says.

He says there tends to be an over-em­pha­sis on sav­ing, when we should be con­sid­er­ing long-term re­turns.


We’re re­peat­edly told that South Africans are a na­tion of spenders, not savers. Yet a sig­nif­i­cant num­ber of South Africans are sav­ing by way of reg­u­lar con­tri­bu­tions to re­tire­ment funds, unit trusts and stokvels, Nathan says.

Al­most 11 mil­lion peo­ple in South Africa con­trib­ute to a re­tire­ment fund and these funds have as­sets worth about R4 tril­lion. And about 11.5 mil­lion South Africans be­long to one or more of the 810 000-odd stokvels, which are cus­to­di­ans of an es­ti­mated R49 bil­lion. The num­ber of savers ex­cludes the un­known num­ber of in­vestors in the lo­cal unit trust in­dus­try, which is worth about R2 tril­lion.

“Stokvels are an in­ter­est­ing phe­nom­e­non – there’s one in our of­fice. A bunch of peo­ple put in R200 a month, and ev­ery month some­one gets R2 400. It’s a good mech­a­nism for dis­ci­plined sav­ing to­wards a short- term goal. The loy­alty is high and the peer pres­sure is there to stop any­one from miss­ing a pay­ment.

“But a rand in a stokvel is al­ways worth a rand. You want a rand to be worth more – and that’s the dif­fer­ence be­tween sav­ing and in­vest­ing. But you need time on your side,” Nathan says.

Alexan­der Forsyth- Thompson, the head of stokvel in­vest­ments at In­vest­ment So­lu­tions, says stokvels that ac­cu­mu­late money in cash or in the bank have a real op­por­tu­nity to put this money to bet­ter use.

“In­vest­ment and burial stokvels are ac­cu­mu­lat­ing large sums of money that are se­verely di­min­ished by in­fla­tion when left in cash or the bank,” he says. If groups such as these ( only four per­cent of stokvels are “in­vest­ment” stokvels) put their money into the right in­vest­ments, mem­bers may have seen their money dou­ble, triple or quadru­ple over longer pe­ri­ods of time, he says.

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