Investing vs saving
DO you remember a time when $20 used to be a paper note? The Jamaican $20 bill was officially changed to a coin in 2000, symbolising its decrease in value as coins tend to be worth less than notes in a country’s currency. What if you had saved that $20 note under a mattress in 1995? At the time it would’ve been worth about US$0.56. Today, it would only be worth US$0.13, and that’s not counting the loss in value due to inflation. What would it be worth if you had invested that $20 instead? Let’s look at investing vs saving.
TYPES OF SAVINGS
Save for a rainy day, they always say. This means putting money aside for emergencies or for a future purchase. Saving is income that you don’t spend. Methods of saving include putting money aside in the bank, a pension account, or cash under the good ol’ mattress. Most people save for things like vacations, education funds for their children, or for retirement. Financial institutions offer a number of different savings options. These include basic bank savings accounts which offer the lowest interest rates but allow you to access your money easily. Then there are credit unions, which are owned by their members and may offer higher interest on savings. You also have automatic savings plans that allow you to automatically transfer money from your checking account to your savings account every month. Then if you want to save for a long period of time, from several months to years, you can take out a certificate of deposit (CD). These often yield the highest interest of any savings option offered by banks, but make it much harder to access your money.
ADVANTAGES OF SAVING
*There’s a low start-up requirement. Many savings accounts can be started for just $2000, so you don’t need alot of money to start.
*Easier access and availability. Savings accounts are easy to open and you can withdraw and deposit money anytime (within limits of course) through ATMS or using online banking.
*It’s a liquid asset, meaning it flows into your pocket easily. Since savings accounts deal in cash, you don’t have to worry about selling investments or making other complicated moves when you’re ready to access your money.
DISADVANTAGES OF SAVING
*Low-interest rates! Interest rates on savings accounts in Jamaica range from 0.05 to 2 per cent, and that rate is based on how much money you put in your savings and the type of savings plan you chose. The more money you save, the higher the interest rate will be — but the earnings are still very minimal.
*Access and availability. This is also in the advantage category, but being able to easily access funds can make long-term saving difficult. You know when you put money aside and you say you’re not gonna touch it but it’s there, so you touch it? (Those shoes were just too cute! And they were on sale, so really, I was still saving money, right?)
*Inflation. Prices increase over time, and as a result your money does not go as far as it once did. If your savings account doesn’t pay a competitive interest rate, and realistically most of them don’t, inflation could be eating up the value of your earned interest, leaving you with an account balance that may be worth less in a year or a few years if the purchasing power of the dollar goes down. For example, say you deposit $1,000 in a savings account with a 0.09 per cent annual interest. You would earn 90 cents in interest at the end of the year. However, Jamaica’s inflation rate averages about 5 per cent a year, so what you could have bought with $1,000 costs $1,050 a year later. As a result, even though you’ve earned 90 cents interest, you’ve lost $50 in purchasing power due to inflation.
ADVANTAGES OF INVESTING
Investing is buying assets such as stocks, bonds, cryptocurrency, or real estate with the expectation that your investment will make money for you. Here are some of the advantages of investing your money:
*There is potential for greater returns. Some investments can triple or quadruple your money or more over time or even within very short periods, as we’ve seen before with some stocks like Gamestop. Investing in stocks, for example, offers the potential of an average annualised return of about 10 per cent.
*Investing is a great way to beat inflation. Historically, since investments tend to have higher returns, they often allow long-term investors to beat annualised inflation rates. Inflation is simply a measure of price changes for goods and services. Jamaica’s inflation rate for the past twelve months is about 5 per cent. This means the average cost of goods and services in Jamaica rose by 5 per cent in that time. If you’re making 10 per cent return on stocks then you’re beating inflation, but if you’re earning anything less than 5 per cent by saving in a bank, then inflation is beating you! Your money is worth less at the end of the year than when you put it in, making it much more difficult to meet your financial goals. Imagine you’re saving towards a house, but as you know, house prices keep going up and up and up. With regular savings, you don’t really stand a chance.
Investing offers more than one way to make money. Some investments, like stocks, provide cash flow through dividends, as well as revenue from sales if investors chose to sell their stocks. Additionally, with real estate, persons can resell the property at a profit or choose to collect rental income. Whatever the case may be, investments often provide more than one way for your money to make you more money.
DISADVANTAGES OF INVESTING
*The major disadvantage of investing is that it’s riskier than saving. Savings are considered safe money, but there’s no 100 per cent safe investment. There’s always the possibility that you may lose money. Real estate can become less valuable, though this is not common; cryptocurrency prices can swing wildly as we’ve seen recently; and stock prices fluctuate based on everything from how the competition is doing to public confidence in the market. For example, at the beginning of the novel coronavirus pandemic, everybody was trying to sell their stocks at the same time, causing stock prices on the Jamaica Stock Exchange to fall by 30% in just a few weeks. If you were in a situation where you lost your job due to COVID-19, right when you needed that money you’d have to take 30 per cent less than you put in — so there is some comfort in the safety of cash savings.
*Investing can also be an emotional roller coaster since markets are volatile. For example, you saw what just happened with Bitcoin. The value fell by 30 per cent in a matter of days. In terms of stocks, sometimes people buy high and sell low out of fear. Investment risk can be decreased, however, by diversifying your portfolio based on your financial goals, and maybe not monitoring them every single second of the day… just saying.
*Profitable investments can be costly. There’s a saying, “Good things nuh cheap and cheap things nuh good.” While this may not always be the case, when it comes to investing, some of the better opportunities may cost you. Investing in real estate can be costly. The same can be said if you want to invest in certain cryptocurrencies or stocks, but the rewards are often significant. A piece of advice that always comes in handy: “Do not put all your eggs in one basket.” Some investments that may appear to give high returns may also come along with higher risk levels. It’s important that you research before making decisions involving your money.
SAVING VS INVESTING
Here’s another example. If you deposited $2,000 in a savings account at 3 per cent annual interest, it would grow to $3,200 in 20 years (before taxes). The same $2,000 invested in a stock mutual fund earning an average of 10 per cent a year would grow to $13,455 in 20 years (before taxes).
Making a choice between either saving or investing will depend on your goals for your money and your risk tolerance. It is better to strike a balance between risky and safe by making researched investment decisions instead of saving. This way you can see just how much growth potential your money has. A formula used by a lot of successful people is S=I: Savings = Investments, meaning if you’re saving money, put it into investments so that it can earn more money.