There are features unique to both financial saving and investing, and understanding their different attributes is important. Saving preserves and protects money, while also accruing compound interest, whereas investing allows money to grow within share market fluctuations. Both saving and investing are used as short and long-term strategies for financial gain.
Investing entails greater risk and is usually undertaken with astute financial guidance. On the other hand, saving money and accumulating capital is less complex and more familiar to most people. Saving with a bank is considered a safe alternative to rolling the dice on shares, especially if finances aren’t fluid enough to cover any losses. It’s possible to get rich quickly, but most fail trying, while the get-rich-slowly savings method will work for anyone with patience and foresight.
The get-rich-slowly financial investment
For the vast majority of Australians, consistent saving is the best strategy for long-term success. Saving always wins, and in a get-rich-slowly scheme, compound interest ultimately does most of the hard work for you. According to principal wealth strategist, David A. Schneider, “An average saver will do better than a great investor who doesn’t save.”
Achieving big profits on the share market is reliant on astute investments, and it is possible to outperform the market, but most novice investors aren’t market savvy. Compound interest derived from savings, on the other hand, is guaranteed. Any additional savings added to the account further compounds the interest, resulting in a snowball effect of financial growth and momentum. Slow and steady growth, without unnecessary dipping into savings, will build dramatically over time and is the key to long-term financial satisfaction.
Saving is investing in your future
Every savings or investment plan aims to satisfy future wants or needs, even if the goal is simply to accumulate more money. The aim is usually to reach those goals as soon as possible. Whether saving with a bank, or investing in shares, the best way to make money grow faster is to add additional funds whenever possible.
Most people are confused by complex share markets and aren’t likely to add savings or diversify their portfolio unless prompted. The principle of growing money with savings, interest and lump sum additions usually makes more sense. For example: adding $5,000 to savings each year, earning 8% interest, results in $247,115 after 20 years. Achieving the same goal in only 10 years would require $15,795 added to savings each year.
Even with a misspent youth and several diversions along the way, it’s possible for most people to embark on a reasonably long-term savings plan that accumulates into a formidable investment. For those who are paying off a home, the same principle applies, although with the aim of reducing debt rather than increasing capital. Paying a regular chunk off the mortgage on a regular basis results in much faster accumulation of home equity and potential investment capital.
Adding to investment savings
Investors are also savers, or at least accumulators. Market volatility can make investors nervous, but there are safe strategies to deal with the ups and downs. By continually adding funds to existing investments, shares are purchased at both lower and higher prices, ultimately resulting in dollar-cost-averaging. Adding capital to a portfolio has a lasting effect and can reap handy profits, especially if market annual returns average the desired 10% or more.
Double your savings and more
The simple ‘rule of 72’ helps savers understand how long it takes for an investment to double. Simply divide 72 by the rate of interest you are getting, and you have your answer. For instance, 72 divided by 6 means it takes 12 years to double the initial investment, whether it is $100 or a million dollars. Naturally, adding additional funds accelerates the process.
Short-term goals and long-term plans
Saving for the future is extremely important, but life goes on in the meantime. Long-term investments aren’t always mature and ready to be cashed in for important milestones such as commencing higher education or getting married, so preserving capital with a dedicated savings account is the surer way to access money when it’s needed. Investing in the future also means investing in memories, so enjoying a little accumulated wealth set aside for special occasions is a sensible investment in itself.
