Savings and investing are often used interchangeably. People say one thing when they could be talking about the other. While the two are related to money, they serve extremely different purposes.
First of all, what is saving? It could be setting up a safe place to park your money in case you need it or are trying to afford something very expensive. The money here may be eroded by inflation over time, but it is safe from financial risks such as dips in the economy.
On the other hand, investing is when you take on some risks with your money, with the hope that it will grow in value and increase your personal wealth.
What are savings?
Putting your money into savings means setting it aside for emergencies or for short-term purposes (like buying a new TV or that holiday to Japan you've always wanted). What this means is that your money is in an easily accessible place, like a bank account.
Many of you already do this with your savings accounts or fixed deposits. If you can move it around quickly without having to worry about taxes or fees, then it counts as savings.
However, do bear in mind that your savings may reduce in value over time due to rising inflation. This is because the price of goods and services goes up over time. As a result, you will be able to afford less with the same amount of savings.
What is investing?
Here, you are buying assets or things that grow in value. The goal is for the value of these assets to increase, where you can then sell them off for profit. This is not always the case, but it is the basics of making an investment.
Investing is designed for growing wealth and should be intended as a long-term goal. You're not investing to earn money to buy the latest smartphone. You're investing because of a longer-term goal or a bigger plan such as buying a house or building a retirement fund. The house can even be part of your retirement plan.
Some investments - like bonds and dividend funds - might also give you regular cash payments. An example of dividend funds are Tabung Haji and Amanah Saham Nasional Berhad.
What should you do?
Saving and investing get mixed up because you actually need both to be financially stable. You cannot rely on one or the other to get by. However, you do need to prioritise how you go about it.
Start by building your savings. Without this, you won't have a financial buffer in the event that something happens. While investments might be worth more, it could take more than a week or perhaps even several months to convert them to cash; which doesn't help if you need cash to replace the brakes on your car right now.
That said, you don't want too much saved up. A general rule is to set aside six months' worth of expenses as savings. This gives you something to live on if you should lose your source of income.
Once you have your emergency savings settled, then you should be investing. Another thing to understand about saving vs investment is the interest. When we invest, we take risks to potentially grow our money. However, we put money in savings to keep it safe with very little return.
Investing is for you to reach your long-term goals. While it's not impossible to save up for a house, it will be much easier if the money you're setting aside is also growing.
Find the balance
Having a balance between your savings and investments is the key to financial freedom. For most, saving money is already a habit, but investing will take a little more time and energy to get started. Going in without enough information could lead to you losing money instead of growing wealth.
Maybank is here to help with the Maybank Financial Goal Simulator. This set of online tools will help you simulate your goal and see what it will take to meet your financial goals. Figure out how much you can afford to save and how much investment risk you need to take on to buy that dream house.
Give the Maybank Financial Goal Simulator a try to figure out how much you should be investing and saving right now.
Disclaimer:
"The information provided above is not to be construed as investment advice and/or the provision of financial planning services. Neither is it to be construed as financial, legal, accounting, tax or any other form of advice whatsoever. You must obtain your own independent advice before making any financial or other decisions. No representations or warranties are provided as to the accuracy, completeness or timeliness of any of the information provided here. The Bank shall not be held liable and/or responsible for any loss as a result of reliance on the information presented."
