I’m so tired of it. Tired of traditional structures like financial houses and mainstream media insisting on labelling us as the ‘avocado-toast’ generation, guilty of frivolous spending and undisciplined when it comes to our financial matters.

boomer

We’ve grown up in a dramatically different era than our parents did, and our views on economic affairs are justifiably cynical. Most of us entered the job market around or after The Great Recession of 2008. The result? Lower-income levels, minimal salary increases and don’t even get me started on the record levels of debt thanks to our student loans. Excuse us then for not trusting financial institutions to have our best interests at heart when it comes to the pennies we do have! 

All that said, its statistics like the below that aren’t doing us any favours in changing the perception: 

  • 47% of UK and Irish millennials find it difficult to save money each month, with 10% unable to save anything at all. (Source)
  • Only 12% of UK millennials are saving towards their retirement. (Source)
  • 36% of UK and Irish millennials believe that investing is too risky. (Source)

Perhaps then, there is an opportunity for us to be doing better when it comes to savings and investments as a means to take care of our financial futures.

But do you know that there’s a difference between saving and investing? 🤔And that ideally, we should actively be doing both!

The Difference Between Saving and Investing

What are Savings?

Savings are made up of money that you put away into a cash-based account (savings account, money market account, etc.) and are typically used to achieve specific financial goals. Think a sun-drenched, fun-filled trip to Bali, a shiny new set of wheels, or perhaps your dream wedding. In these instances, you’ll determine what amount you need to have saved by a particular date, and then divvy that up into regular weekly or monthly contributions.

Savings are also useful to build up an emergency fund (or what I call my ‘if sh*t happens’ fund). A general guideline is that we should have a savings balance of at least 3 months worth of income 💷💷💷 set aside in an account with easy accessibility to relieve stress around unexpected events or expenses.

Savings are normally held in cash. As a result, they’re considered to be reasonably risk-free in that the money you put away will be there when you want to withdraw it. Different types of savings accounts will have different notice periods for withdrawals. Some will allow instant access, while others will require you to give a specific notice period, e.g. 3 days or 1 month. 

The snag with cash-based savings accounts? Two words. Inflation and interest. 

Banks will typically offer you a nominal interest rate on the balance of your savings account, so you’ll eventually land up with a bit more money than what you put in. But often, they’ll battle to overcome the impact of inflation. The grim reaper of modern money that erodes away the value of your savings over time. Meaning that when you do withdraw, the purchasing power of your overall balance will likely have decreased. 📉

That said, it’s still wise ‘adulting’ to put money away for future expenses, whether planned or unplanned. 

What are Investments? 

Investments differ from savings in that they’re more of a long-term option, and the concept is that your capital amount will work harder for you and deliver better returns (compared to savings) in the long run.  

money

The goal is to beat inflation rates, while also benefiting from the compound interest effect. Compound interest simply means that you'll earn interest on your capital as well as the interest you've already accrued. For example, let’s say you have £1,000 invested as your primary capital, and you’re earning 5% interest per annum, your returns after 10 years would look something like this (excluding any fees).

What Compound Interest Looks Like 

End of Year

Capital + Interest

Interest Amount (5% per annum) 

1

£1,000.00

£50.00

2

£1,050.00

£52.50

3

£1,102.50

£55.13

4

£1,157.63

£57.88

5

£1,215.51

£60.78

6

£1,276.28

£63.81

7

£1,340.10

£67.00

8

£1,407.10

£70.36

9

£1,477.46

£73.87

10

£1,551.33

£77.57

 

Types of Investments 

There are various investment options to choose from. Some examples are:

  • Direct investing in stocks or shares 📊
  • Buying property directly 🏠
  • Purchasing government bonds
  • Buying into funds so that you're indirectly invested in property, the stock market, cash assets, bonds, or a mix of the bunch 
  • Bitcoin 
  • Gold or precious metals🥇
  • Art or other collectables 🎨

You can learn more about Bitcoin in our latest eBook - What is Bitcoin? 11th Birthday Edition. Download your free copy here

The Risk-Reward Ratio 

A core difference between savings and investment is the so-called risk/reward ratio.

Savings in a cash account are considered to be relatively ‘safe’ as you’re not putting your capital investment at risk, but you’re also not likely to earn much in the way of rewards. 

Investments, on the other hand, might offer you a greater return (or reward) in the long-run, but you must also accept that any investment could drop in market value almost overnight based on market sentiment, asset bubbles bursting, etc. This is why you’ll often be cautioned to never invest money you can’t afford to lose, and you should carefully consider the risk-reward ratio of the investment funds you choose. The great aspect of starting investments young in life though is that because investments are long-term ⌛, you’ll be able to ride out any short-term dips if you remain calm and focus on the fundamentals.   

Another consideration is the prevalence of scams out there! And this is why it’s critical for you to do thorough research before handing over money for any investment! If you’re not comfortable with this, it’s a good idea to seek out a professional who can either advise you or manage your investments on your behalf.  

To wrap up, let's do a quick recap! 

The Key Differences Between Savings and Investment

Savings

Investment

Good for short to medium-term financial goals

Better for longer-term financial objectives

Cash-based accounts such as Savings Account or Money Market Account

Investing in various asset classes directly or indirectly such as property, stocks and shares, government bonds, bitcoin, gold, or art

Lower risk-reward ratio: lower risk, but also lower returns

Higher risk-reward ratio: higher risk, but potentially higher returns


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