If you have extra money left at the end of the month, you may have considered stashing it in a savings account. However, at what point should you invest your extra cash, rather than saving it?
We have a look at the differences between saving and investing, and we find out how you should decide which one to pursue.
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The difference between saving and investing
Duann Cronje, certified financial planner at Fiscal Client Private Services, says that there’s one factor that clearly separates saving and investing.
“Saving refers to money that’s not exposed to markets and would retain its value in real terms. Investing refers to money that’s exposed to markets so that it can make a profit or grow over the long term,” he says.
The timeframes for saving and investment are different too. “When saving, we would generally access these funds within the next 12 months,” Cronje notes. “Therefore, it’s prudent to save the money you need to access soon in a money market-type savings vehicle.”
“These funds would typically cover your emergency kitty of three to six months’ worth of ongoing expenses, as well as other general expenses, such as your car and home maintenance, travel, or medical expenses that are not covered by your medical aid or gap cover,” he adds.
On the other hand, Cronje says, when you invest, you put money away for the long term, with the goal of attaining growth or profits.
“These profits would need to beat inflation so that you can ensure that your money grows in real terms. Your longer-term investments should be able to replace your salary and cover your general expenses once you plan to stop earning an income, such as during your retirement,” he says.
Which one should you choose?
Danie van Niekerk, executive head of financial services at Indwe Blue Star, says that whether you choose to save or invest depends on the outcome you’re hoping to achieve.
“Among other things, you need to consider how liquid your funds have to be, the timeframe you plan to work with, your appetite for risk, and the tax implications of your choice,” says Van Niekerk.
Cronje points out that most South Africans will not be able to retire without dropping their standard of living, due to a poor savings culture.
“In order to prevent this, it’s important to strike a balance between saving and investing that works for you in the short term, while also providing for your needs over the long term,” says Cronje.
He believes that a good starting point is to invest 15% of your salary for the long term, and the key is to leave it untouched so that it can grow through compound interest.
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