Saving and investing are similar, but different

If one were to ask South Africans what the main difference is between saving and investing, it’s likely that most would respond that saving is a short-term activity, while investors are trying to build up money in the long term.

Although this isn’t entirely incorrect, it’s certainly not the only difference between the two. While each activity has the ultimate positive outcome of growing one’s capital, it’s important to clearly understand the differences, and similarities, between the two activities if you want to be successful at either.

That’s the view of David McCall, executive: investments for retail and business banking at Nedbank, who says that understanding how saving and investment are designed to deliver different, but equally positive, future financial outcomes is key to not only ensuring that people are choosing the right approach to growing their money, but could also help South African consumers finally realise how important saving actually is.

According to McCall, the main difference between saving and investing has to do with goals and choices.

“Bank savings accounts are specifically designed to enable people to build up money towards a specific near-term objective, which could be anything from a family holiday or a kitchen appliance to an unexpected financial emergency,” he explains.

“So, in essence saving is a commitment to postponing your spending until you have the money you need.

“Investing, on the other hand, is the process of growing your money for a more general goal that, unlike saving, most often doesn’t have a particular pricespecific outcome in mind.”

OUTCOMES

McCall points to these two distinctive outcomes as being the reason why savings accounts and investment vehicles are structured so differently. “The vast majority of savings accounts are designed to leverage the bank’s financial structures to deliver a specific amount of growth for the saver, with little to no risk to their money,” he explains.

“Investment vehicles offer a huge range of ways in which investors can grow their money in line with how much of that growth they want to achieve and, as importantly, how much risk they are willing to take with their money to do so.”

McCall says that while few South Africans fully understand the difference between saving and investing, it is interesting that many people implicitly accept and embrace the need to invest for their future financial wellbeing, for example by diligently putting aside money every month for their retirement. However, few are willing or able to exercise similar levels of self-discipline when it comes to saving for the short-term items they want.

“Given that SA has relatively high interest rates compared to most developed countries, the interest growth that can be achieved in many savings accounts is quite attractive, particularly when one combines these with the positive impact of compound interest (earning interest on your interest over time).

“This makes it difficult to understand why so few South Africans are saving for the things they want and, instead, getting themselves into expensive debt by purchasing them with money they don’t actually have.”

McCall is adamant sound financial education is the key to fixing this issue and creating the same positive attitude towards saving that many South Africans already have towards, for example, retirement investments. He believes banks, government and employers share the responsibility to help build such a culture.