There is often a lot of confusion about investing and saving money and the differences between them. A lot of people may even use the terms interchangeably and think that they are pretty much the same thing. This is not the case though and it is a good idea to make sure that you do have a good understanding of the difference because it could make a huge difference when you are deciding what to do with your money. The main differences are explained below.
- Long Term vs Short Term
You will find that if you take out an investment, the value of it will fluctuate a lot in the short term. This means that the value can go up and down and lot. Therefore, if you cash in quickly, you could find that you will get back less than you paid in, especially as it is likely that there will be administration charges as well. However, with savings it is likely that you will still make a little bit of interest even if you only have the money saved for a short amount of time. If you have it in an instant access account then you will be able to draw it out as soon as you like and you will get the money back plus any interest that it has earned.
- Safety of Money
With an investment you are buying an item with the money. Then when that item is sold, you will get back what it is worth. You might be buying shares, property, art or other things. If the value of the item goes down then you will get less back than you paid in for it. You may even find that the value falls so low that you get back nothing at all. With savings, as long as you put it in a place covered by the regulator, you will be guaranteed to get your money back.
- Rates of Return
The big attraction of investment for many people is the promise of great returns. For a savings account, the interest rate tends to be very low. Even if you tie your money up, you cannot expect to get that high an interest rate. However, with an investment, the returns can potentially be really high. It can be possible to a growth which is get many times more what you can get on savings.
You therefore have a difficult decision to make. By taking on an investment, you will be taking on a large risk. It will be possible for you to lose money and you could even end up with getting back a lot less money than you put in. However, you could find that you will get more money back because it performs well, compared with savings. You are more likely to do well if you invest for a long time though and that means that you are likely to need to keep your money tied up for at least five years, if not a lot longer. It is always worth thinking about the money and what you are prepared to do with it. Think about whether you are happy to risk losing it, if not use savings. Also think about whether you can afford to lose it, if not save it. Then think about what you are happy about the stress of taking a risk and how you might feel if the money reduces in value significantly. This will enable you to think about whether you are prepared to invest or save the money that you have. It is not an easy decision but once you know the main differences then this will help you.