21 Oct
It’s not foolish to say that money plays a huge role in every Pakistani’s life. We are somehow inevitably conditioned to know its worth 💸 Our childhoods are marked by the gift of a tin money box, complete with the smiling face of a popular cartoon character on the front. Later in life, we’re nagged by uncles to save as much money as we can for our old age, or have colleagues try to convince us to “buy mutual funds” (whatever that means) 👀
Don’t get us wrong, the advice from your uncles and colleagues is extremely valid. Being in your teens or your early thirties shouldn’t stop you from building a solid financial plan 💪 However, building this plan requires a clear understanding of the differences between saving and investing. Choosing how to create wealth is a question of choosing techniques that will help you meet your financial goals. We’re here to provide some clarity on the matter, so that you can pick the option that works best for you 🥳
The Difference:
To put it simply, saving is the act of setting funds aside to meet financial goals. You could be saving money for a new laptop, or starting an emergency fund 💵 As you build your savings, the money is closer to being readily available whenever you need it. There is also no risk of the money losing its value.
Investing, however, is the act of putting money into something to generate profit. There are many different ways to invest. You can invest in a venture , like starting your own business 💼, in assets like real estate 🏠, or in stocks 📈 These investments offer you returns, and you can also sell them later at a higher price. Investments are targeted towards more long term financial goals: some parents, for example, invest to be able to afford higher education for their children.
The main and perhaps most important difference between saving and investing is the risk factor. We mentioned that when you save, the value of the money you’re collecting stays the same. With investing, that’s not always the case. People who choose to invest assume that their money will grow over time. Sometimes, though, you risk losing money 😬
The Similarities:
Technically, there aren’t a lot of similarities between saving and investing. What brings them together is the critical role they play in shaping a brighter financial future 🙌. Both require commitment, discipline and reasonable financial knowledge. Both also require you to navigate the ups and downs of the economy.
The difference matters because each decision will impact your finances in different ways. Before we get into the pros and cons of each option, we also want to let you know that you can save and invest at the same time if you’re able. The two options are not mutually exclusive – you just need to time them based on where you are in your financial journey📍
The case for savings:
- Low risk: With savings, you know how much money you want to keep aside, and the value of this money does not fluctuate based on the market or the economy.
- Predetermined interest rates: Some banks have a fixed amount of money you can earn on saved funds. If you open a savings account, there might be a chance that your money will earn interest.
- Easy access: The best part about saving is that your funds are available for use whenever you need them.
- Easy to begin: You can start saving at any point in your life. You don’t need extensive knowledge of the market or of economics to get things up and running. All you need is some motivation (and a bank account!)
Arguments for investing 📉:
- The chance of higher returns: With the right kind of knowledge and assets, there is a high chance that you will profit off of your investments. This can mean buying stocks intelligently, purchasing land that has great resale potential, or paying a broker to make strategic financial decisions for you. You know how the old saying goes: the greater the risk, the greater the return.
- Beat inflation: Since investment helps you grow your purchasing power with higher returns, you may be able to withstand financial crunches during periods of inflation.
The downside 🤔:
- Returns aren’t guaranteed: Investments are risky by nature, and are likely to experience a lot of changes in value. You may lose a lot of money at different points in your journey, and might not make gains at all. Some investments, such as starting a business, are tied to the huge risk of losing large sums of money.
- Financial knowledge: A lot of knowledge is required when investing. The knowledge doesn’t just pertain to age-old financial techniques and jargon, but also market conditions. The more knowledge you have, the more of an informed choice you can make. However, financial knowledge is not the easiest to access or acquire for many.
- Extra costs: Because you need a lot of knowledge to be able to invest strategically, some people hire investment advisors or accountants to make decisions for them. Consultation fees from financial advisors are additional expenses you’ll have to cover during your investing journey.
The verdict 📑:
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The knowledge we’re providing here is basic, but outlines the major differences between two financial practices that have been used by many for years. Past successes or failures won’t necessarily define yours. If you want to save and play it safe, that’s justified. Not everyone has an appetite for high risk. If you want to invest, tailor it to your goals – know Warren Buffet and his investment guru friends capitalized on the right information at the right time to make a plan that met their needs. And that’s exactly what you should do, too 😎.
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