When it comes to preparing for the future, you have two tools at your disposal: saving and investing. Saving is the familiar act of putting money away. It could be for a rainy day, an upcoming milestone celebration, a big purchase, or the eye-watering registration fee for tertiary studies – anything, really. Some people grow up putting their money into a piggy bank or hiding it under their mattress. For others, it’s a low-risk savings account like a notice deposit or fixed deposit account at the bank.  

Saving is especially valuable for the short term, if your goal is, say, something you need three to 12 months to prepare for. But for the long term, saving won’t grow your money in the way that investing does. While both saving and investing are necessary, it’s wise to place greater emphasis on your investing activities. Here are three reasons why.

Reason 1: Investing is not the same as saving

We’ve established that saving is putting money away for the near term. This differs from investing in that investing is not about putting money away, but actively buying into an asset that is expected to grow in value over time. As the asset increases in value, so does your investment.

Placing your money into a savings account means it’s more likely to be negatively affected by inflation, which chips away at the purchasing power of your money. However, investing in an inflation-beating option gives your money an opportunity to maintain, if not grow, that purchasing power.

So while saving and investing can support each other to meet your financial ambitions, investing is not the same as saving – and few things will help you build wealth like investing wisely.

Reason 2: The eighth wonder of the world

We’ve mentioned that investing gives your money more room to grow, so you’re probably wondering how exactly it grows. Two words: compound interest, or the eighth wonder of the world, according to Einstein.

Compound interest is the interest you earn on your interest. By investing your money for longer, it has more opportunities to generate interest and earn interest on top of that interest, and earn more interest on that interest. You get the point. This is why you’re likely to hear the term “time in the market” being emphasised, as it’s time in the market – i.e. the time invested – that really propels your investment(s).

Reason 3: Diversification is a darling

Another reason to focus on investing is that you have more options compared to saving. You can invest in different types of assets that are local or international. For example, you can buy stocks on the Johannesburg Stock Exchange and invest your money in South African companies, or you can take your money abroad and invest in international stocks using the global money app, Shyft. Shyft gives you access to more than 800 top global stocks across four international exchanges (New York Stock Exchange, NASDAQ, London Stock Exchange, and Frankfurt Stock Exchange), with options from Apple (AAPL) and Airbnb (ABNB) to Zoetis (ZTS) and Zoom (ZM) – all while sitting right here in Mzansi.

Why is this important? Diversifying across geographies, sectors and asset types hedges the risks that are inherent to investing. If the local market isn’t performing, your investments will get a boost from your international holdings, and vice versa.

The high-risk factor

Speaking of risk… Investing is generally a risky activity as you can never fully anticipate how an asset will perform, how the markets will develop, or which global geopolitical events may take place and alter certain supply and demand dynamics. This shouldn’t discourage you from investing, but it does mean taking care to do your research, getting expert advice, and making sound decisions about where your money goes.

There are some asset types that are less risky, but on the whole, expect a greater level of risk when investing compared to saving. That said, on the other side of this risk coin is returns. Low-risk investments (such as savings accounts) typically provide low returns, and high-risk options tend to generate greater returns – so you have to take the good with the risky.

Goal-based investing

The other thing to keep in mind with investing is your goals. It’s important to make your investment decisions according to defined goals. To help you get started, take time to jot down the money-related goals you want to achieve and then sort them by short-, medium- and long-term horizons. This will help guide the appropriate assets to invest in.

On that note, happy investing!
 

Disclaimer: The views shared are for informational purposes only and do not constitute financial advice. One should always conduct their own research before making a decision and/or seek advice from a professional.