Savings and investments are both sourced from an individual’s disposable income. This may lead to a general confusion between the two concepts.
This article will highlight the key differences between savings and investments by elaborating on the benefits and drawbacks associated with both concepts.
The main purpose of saving is to accumulate funds in order to satisfy unforeseen expenses. Since savers expect easy access and relatively lower returns, their risk appetite is lower than that of an investor. Moreover, lower risks are usually associated with lower returns. This suggests that high inflation may have a negative effect on savings, as savers can purchase fewer goods (due to increased prices) over time.
Therefore, it is unlikely that savings alone can increase wealth.
Conversely, the purpose of investing is to create wealth. Investing typically carries a longer time horizon and ultimately leads to a higher risk of losing value, due to the fact that it is challenging to predict what the world will be like in the long run. It is important to note that risk translates into uncertainty.
On a positive note, responsible investing satisfies large demands such as an individual’s retirement or future university fee commitments. Furthermore, investments have higher levels of uncertainty with regard to future returns and are prone to short term fluctuations. The reward for enduring volatility is higher returns and wealth creation.
Inflation is the general increase of prices in a market. This is important to consider as significant events, such as a retirement, would require you to earn growth on your investment at a rate that exceeds inflation over the long term.
It is evident that investing improves purchasing power over the long term. The average annual local inflation rate over 42 years is 8.71% whereas the average annual returns from the investment is 12.5%. This clearly shows how investing increases your purchasing power and builds wealth in the longer term.
In conclusion, savings products have lower levels of associated risk and are easily accessible in cases of unforeseen expenses. Savers experience significantly lower returns and may potentially lose purchasing power to inflation (uptick in the general prices of goods). Investment products exhibit high levels of short-term fluctuations, but generally provide higher returns and capital formation.
Thus, investments should be considered for wealth creation over longer time horizons and savings should be used as a buffer for unforeseen circumstances in the shorter term.
*John-Morgan Bezuidenhout is a Namibia Savings & Investment Association Economic and Research Policy Development Committee Member
