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The difference between saving and investing

By Faeza
22 June 2016

AT year-end, people will be getting their bonuses and stokvel payouts. Many of them don't know exactly what to do with the money, so they spend it instead of saving or investing it. The words “saving” and “investing” are often used interchangeably, but that is incorrect. “Understanding these concepts will go a long way towards ensuring your financial future,” says Eunice Sibiya, Head of Consumer Education at FNB.

SAVING VS INVESTING

Eunice says, “Saving means putting money away for a goal or to help you when unexpected expenses come up. Investing is the long-term strategy of putting money away and letting it grow.“ Hence, saving is putting away money for renovations or times of crisis, like when you get retrenched. You can either put this away in the bank or save with a stokvel. “It is important to understand the difference between saving and investing, as they are two ways of making your money work for you to achieve different goals,” says Eunice.

WHY YOU SHOULD SAVE

“Having savings means regularly putting away part of your income into a low-risk or no-risk account, so your money is guaranteed to earn an interest and the original amount that you initially saved is safe." Regular deposits slowly build up, and this money can be used at a later stage.

Savings are vital as building up reserves will ensure that you are financially secure when you are hit with unexpected expenses such as a medical emergency. It is also a way of paying for large expenses such as holidays or school fees without getting into debt.

“Every South African with an income should be saving. Those who haven’t started say they don’t have the money. But if they examine their budget, they will find that they spend money on unnecessary items, such as clothes or entertainment," she says. Another misconception is that you need lots of money to save, but putting away the little you can spare can kickstart this critical step in your financial journey.

THE IMPORTANCE OF INVESTING

When investing a lump sum, there is no guaranteed interest rate, and no guarantee you will get your money back. So investing is riskier than saving because the markets can go up or go down over time.

You may need to withdraw your investment when a recession hits, for instance. On the other hand, you may profit from the growth of the investment. “Investing is when you commit money long-term and let it grow,” says Eunice.

“Investing may seem intimidating, with concepts like stocks, unit trusts or bonds, but a financial adviser can help you understand investments better. “Investing is not gambling. It is the next step after saving to make your money work for you and provide additional income in the future. But like anything, before committing your money, find out exactly what it can and cannot do for you.”

Move Tip: There are various options to save or invest with financial institutions. Consult a financial adviser about what to do with your money.