When planning your finances it is important that you understand the similarities and differences between saving and investing your money. It can be argued that both the practices complement each other, with savings being used as a means for investment in most cases.
Savings are generally considered to be money and other assets which have been kept for a long period of time, without the risk of individuals making a profit or a loss.
Essentially, when you save money, your capital is secure. Examples include savings accounts, checking accounts and certificates of deposit.
Savings tend to be used by individuals to fulfill short-term needs and with the guarantee of secure and accessible money are popular methods of controlling finances. However, the returns that individuals will see from their savings are likely to be minimal.
According to the most recent Office for National Statistics figures, people in the UK are currently saving less now than in 1970. The household saving ratio in the UK in 2008 was 1.7 per cent of total resources.
Investments are considered to be purchased with the aim of making some sort of monetary gain, whether as an income generator
, as a means of reducing costs or something that will appreciate in the future. Investments are generally thought to carry a higher risk than savings and normally involve the chance that individuals could suffer some sort of loss.
In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.
Investing tends to be used for long-term capital growth and can be done through the purchase of real estate
, stocks or bonds, among others. Investing offers individuals the chance to benefit from large returns, but they come with the risk that if the object of investment fails money could be lost.
Saving can be a useful method of earning a small amount of money on top of a lump sum and faced with the mistakes that could be made from buying into or holding on to the wrong investments, it is an attractive option for many.
However, the potential gains that individuals can benefit from with carefully chosen investments
mean that the more risky option is a tempting choice.
- Wednesday 05 May 2010