Saving vs. Investing: Which Is Better?
So which is better, saving or investing? Well, the answer depends on your short-term or long-term goals. However, if there is one mistake you can make when deciding between the two, it's heavily relying on only one — especially if you choose the "savings" option.
Opinions expressed by Entrepreneur contributors are their own.
"Saving" and "Investing" are two of the most common words in financial circles. We hear these words so often that people sometimes use them interchangeably. Experts say you should have at least one to secure your money's future, but these two words have very different purposes.
So which one should you choose to take care of our finances? Which one will give you the most benefit in the long run? And how do you even get started with them?
If you're wondering the same, this article will help you decide.
It starts with a purpose
At their core, saving and investing are two different methods of preventing loss or growing your finances. They also vary in results. Here's how you can distinguish between the two:
To "save" money is to put it on hold for some time. You can save it in a bank, in a safe, or even in your wallet. Saving money means you want it to be available at any time.
If you have short-term goals like traveling by the end of the year, buying your wants and needs or even having money for emergency funds, you may want to start saving for them. Experts recommend you maintain a "cash cushion" or that balance to protect yourself from unexpected expenses equivalent to 3 to 6 months of your spending.
To grow your money over time, you need to consider investing it. Usual investments require you to use your money as capital for future financial growth. And there are lots of places where you can invest your money, like stocks, time deposits and even real estate.
Unlike saving, which is only suitable for short-term goals, investing is recommended for long-term ones. This includes retirement funds and your children's college funds.
So which is better, saving or investing? Well, the answer really depends on your short-term or long-term goals. However, if there is one mistake you can make when deciding between the two, it's heavily relying on only one — especially if you choose the "savings" option.
Many people think saving is superior to investing because you don't have to worry about risking your money for some unsure investment. However, choosing only to save money may result in losing more.
Saving money involves more considerable risks
Investing your money may be risky, but so is saving it. Factors like inflation may erode your money's value over time. Ever noticed the dollar not being able to buy the same things that it could ten years ago? That's how inflation works.
If you're considering using your short-term savings for long-term goals, you may be tempted to keep it in a bank for annual interest. Sure your money will be safe from being spent on unnecessary things. But did you know that banks benefit more from your money than you do?
The bank uses your money to loan other members for 12% interest, and you'll only get 2-4% of that yearly. This means that they get to keep 8-10% of it, and they just make money out of your money.
So if you don't want to lose its value and you don't want other people to use it for themselves, you may want to consider investing it somewhere and making it grow yourself. But where should you invest?
Related: How To Start Investing
Stepping toward passive income
There are multiple ways and many places where you can invest your hard-earned money to get the best out of it. As mentioned earlier, there are numerous opportunities like stocks and bonds, high-yield time deposits, and even crypto you can try.
However, some of these may sound too complicated for you if you're a beginner. Try to find something that is beginner-friendly and will also help you generate passive income.
Real estate is one great example of this. Most properties appreciate over time, and it's pretty simple to understand. You can buy and sell properties for more significant profits. Or, if you want passive income, you can use them as rentals.
Now there are two types of rentals: Long-term Rentals and Short-term Rentals. A long-term rental is where you use your property to get monthly rentals from tenants, and a short-term rental is where you rent out your property for nightly rates.
The main difference between these two types is the stability of their streams. With long-term rentals, you'll get a more stable income monthly, but you can only get a fixed amount, while short-term rentals are much more varied but have higher chances of yielding more significant revenue. Take note of these differences if you're investing in either.