Saving and investing contribute to your financial independence but they have different goals and play different roles in your planning.
Knowing these differences fully will avoid bad times when you make decisions about what to do with your money.
While savings seeks to protect an amount of money in a given period of time, investment aims to increase that amount, with associated risks.
What is saving?
It is the action of allocating an amount of money for its preservation. It is an amount that you can set aside without seeing yourself in financial trouble.
Ideally, you can invest it in a savings product, such as a term deposit or a savings account, whose base asset is always cash. The person deposits once or periodically an amount that earns interest for a period of time using a deposit interest rate.
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The amount you save depends on the plan you have. Once a person manages to save money, then only can he evaluate the different ways to increase it through investment, affirms the Association of Supervisors of Banks of the Americas (ASBA).
What is investing?
Investing consists of the purchase of physical or financial assets to obtain future benefits, through the profitability of a financial instrument or the sale of a physical or material asset (a property) with a profit, explains the Commission for the Financial Market.
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That is, the investment aims to obtain a sum greater than the amount of initial capital.
Beginning investors typically put their money in productive assets like real estate or financial instruments like mutual funds, exchange-traded funds (ETFs), stocks, and government and corporate debt bonds.
Now that you are clear about the difference, take note of these good practices so that you apply savings and investment correctly in planning your personal finances:
- Understanding the importance of saving in the first stage of your financial life allows you to understand the importance of the value of money. This knowledge helps you make better investment decisions.
- Avoid using debt money (credits) or capital that is destined for other purposes (basic expenses, loan payments, emergency funds, etc.).
- Both to save and to invest, you stop using a sum of money for a certain time. That’s why plan your expenses without considering that money.
- Save and invest in financial instruments offered by institutions certified and authorized by the Commission for the Financial Market (CMF) and the Superintendency of Pensions (SAFP).
- Avoid informal savings or investment (bed mattress, pyramid investments or bets) because the risk here is greater due to factors external to financial variables (theft, fraud, etc.)
- When saving, make sure to verify that the redemption times of the capital are short to receive your money quickly (maximum period of 24 hours).
- If you invest part or all of the money saved, make sure you separate the amounts into different instruments and with varied risk levels, so you always ensure you have a protected amount and another more exposed to the fluctuations of the market.
- When you save your biggest concern is inflation (and its counterpart, deflation). This process of price variation modifies the value of money at a given time.
- Plan the amounts you have to save or invest based on your total income. An easy way to determine these amounts is by following the 50/20/30 rule.
Understand the differences before using your money
Saving and investing are not the same. The big difference between both financial alternatives is in the risk you assume.
A person who saves large sums of money is not necessarily a successful investor. Meanwhile, a diversified and balanced investment can include savings mechanisms as an alternative to protect part of your assets.
The importance of savings or investment for your pocket will depend on your needs and stage of financial life in which you are.