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The Difference Between Saving and Investing - Why Investing Matters

Saving and investing are both important, but they aren’t the same thing.

April 30, 2020

Saving and investing are both important, but they aren’t the same thing.

The main differences between saving and investing is where you put the money and the risk vs return you accept.  Saving typically, is putting money in a bank account or term deposit which pays a set % interest rate.

Investing is, buying assets like shares, property or fixed interest securities for the purpose of earning a higher rate of return than putting money in a bank account.

The return on most investments is typically unknown and can fluctuate from year-to-year.  Over longer periods of time, there is more certainty and the average 20 year return on Australian shares until 31 December 2017 was 8.8% p.a and direct property was 10.2% p.a1.

When you put your money in a savings account, you’ll get paid (at the moment - a small amount of) interest – currently somewhere between 0.10% and 2.10% p.a.   While there is no risk of loosing money from your savings account balance, you do risk losing the purchasing power of your money, due to inflation.  How?

If your return on savings is lower than the inflation rate, you’re losing purchasing power (read money !) over time. The Inflation rate (measured by a thing called CPI) was 1.61% in 20192.  So, if you were getting 2.1% return on your savings, once you reduce the inflation rate of 1.61%, you were effectively only 0.49% better off.  Yep!

The flipside is investing, however returns aren’t guaranteed, and there’s a good chance you could lose money at least in the short term (let’s say 1-3 years) as the value of your investments fluctuates up and down.  However, making a long-term commitment to investing (say, 7+ years), based on past returns, you should be substantially better off, even after inflation.

If you’re thinking investing is downright daunting or complex (like, what’s an imputation credit again?) don’t worry, we’ve got you covered via our online education – Women’s Wealth Accelerator program.

We can all benefit from both saving and investing.   Saving provides us a safety net with access to cash for emergencies and unexpected events as well as a passive income source, while investing provides real growth in your net worth as well as an additional income.

Sources

1. 2018 Russell Investments/ASX Long Term Investing Report

2. www.rba.gov.au (Reserve Bank of Australia)

Warmest,

Karen Eley is a financial coach with more than 20 years’ experience as a financial adviser. Through her business, Women Talking Finance, she helps women to be confident and knowledgeable about all things finance. Karen translates complex financial concepts into simple digestible ideas.

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