When it comes to talking about putting your money to work, terms like ‘investing’ and ‘saving’ are often used interchangeably. They shouldn’t be. There are key differences between the two that are worth understanding as you strive to meet your long-term financial goals.
Ever had an older relative tell you it’s time to ‘start saving for retirement’? What about someone who’s advised you to ‘invest with the future in mind’?
It’s easy to lump these two pieces of advice together. After all, both involve setting aside some cash today for something that occurs years – or even decades – from now.
Investing and saving, however, aren’t the same thing. It’s important to know the difference so that you can understand what kind of returns you can expect on the money you’re putting to work and when you’ll be able to access it again.
Let’s start with a few definitions…
What is investing?
In simple terms, investing involves the purchasing of an asset in the hope that it will grow in value. If an asset becomes more valuable, it can then be sold for a higher price than it was purchased, earning you a profit (or return).
People commonly talk about investing in the stock market – i.e., buying shares of companies in the hope that the price of these rises. However, there are lots of assets (or types of investments) people can purchase. Property, for example, is a common and popular investment many will encounter if they aspire to become homeowners. You may also acquire art, memorabilia, or even fine wine throughout your life. All of these can be investments if your intention is to sell them at a later stage for a higher price than you bought them for.
Investing always carries risk. What you’ve invested in could fall in value. For instance, a company's stock price may drop after poor financial results, your home could lose value if it's located in a new flood zone, or you might struggle to sell those signed Tim Cahill soccer boots from a few years ago.
In general, the more risk you take, the higher the potential returns—assuming everything goes as planned. Now, let’s dive into the key differences between saving and investing.
What’s the difference between saving and investing?
Unlike investing, saving usually means placing your money in savings accounts that offer low interest rates. While this approach limits how much your money can grow, it also provides safety, ensuring your funds are secure even if the market takes a downturn.
If you’re saving money – rather than investing it – one reason could be because you may need it quickly.
Let’s say, for example, you had $1,000. You used half of it to buy shares of ASX 200 companies and put the rest in a savings account.
After a year, your car unfortunately breaks down. And it’s doubly bad – the market has also fallen 10%.
That means the $500 you bought shares with is now $450. If you were to sell these now to pay for your car repairs, you’d be ‘locking in’ a loss of $50. And if the market subsequently rose 20% in a future period, you’d miss out on the opportunity to make your money back.
The $500 you put in savings, however, won’t have lost any value—at least in absolute terms (as inflation may reduce its purchasing power over time). This money could be used to meet your unexpected costs, allowing your investment to remain untouched, ride out the down market, and potentially regain its value.
Why would I invest if it involves risk?
You’re extremely unlikely to lose money by putting it in a savings account, but this doesn’t mean it won’t lose value. Many such accounts pay interest below the rate of inflation. If you only earn 0.5% interest on your money while inflation is at 2%, your purchasing power will be reduced.
Investments in stocks, by contrast, offer the potential for significantly higher returns. Over time, stock markets have demonstrated long-term growth. For example, the S&P 500 has delivered an average annualised return of approximately 10.26% from its inception in 1957 to the end of 2023.
Such returns can help meet long-term financial goals – say if you want to buy a house or go on a dream trip five years from now.
Past performance, however, isn’t an indicator of future results. While stocks have generally offered attractive returns, this is by no means guaranteed. There is always the possibility in any given year the market will lose money. When investing in stocks, taking a long-term perspective can help manage the fluctuations in performance that may occur.
Think about when you need the money you’re putting aside and why you’re doing so. Is it possible you’ll have a big expense due in six months or a year? If so, it may be worth opting to put money in a place where it wouldn’t be impacted by shorter-term market moves.
Whether you’re saving or investing, it’s good to have a plan. Establishing your budget, appetite for taking risks, and what you’re putting money aside for can help with identifying the best place to put your cash.
Interested in getting started with investing? Create an account with CMC Invest today. To learn more share investing, have a read of our knowledge hub.