Saving vs investing: what’s the difference?

Last updated on 6th July, 2022 at 12:47 pm

The terms ‘saving’ and ‘investing’ are often used interchangeably, when, in fact, they each have unique benefits if used for appropriate goals. Here, a financial planner discusses how they both form part of a comprehensive financial plan.

According to a survey conducted by Business Tech in January 2022, more than 60% of its South African respondents said they were allocating 10% or less of their income to savings. To add, less than a quarter of respondents polled said they were putting away more than 20% of their salary every month. Echoing this, findings published by Sanlam as part of its 2021 Letters to My Pre-Covid-19 Self campaign revealed how more than half of South African respondents had seen their savings decrease since the start of the pandemic. As life returns to a semblance of normality, it’s important to prioritise saving, and enjoy the rewards of investing.

Switch on your savings mindset

If you’re debating how best to reach a goal – by either saving money in a generic bank account or investing – well done! You’ve already completed the first step to building your wealth by setting your sights on a goal, and know that delayed gratification will give you rewards later down the line. Both saving and investing rely on habits being built that will bear their fruits in weeks, months, or years to come, depending on your goal. While saving and investing have these similarities, it’s important to note they also have their differences, and how these differences influence how you build up your pocket of savings to turn your goals into a reality.

Want to start your savings journey? We have a tool that can help. Use this savings calculator to help you calculate what you should put away regularly to reach your goals.

Saving and investing: the importance of both

“Both saving and investing can be used to achieve your short-, medium- and long-term financial goals,” says André Wethmar, a senior financial planner at FinPrufe Wealth BlueStar, authorised by Sanlam.

“Saving typically refers to income that is not spent, as you save within a standard bank account,” Wethmar explains. For example, you might need easily accessible cash for an unplanned expense such as the need to replace a kitchen appliance, or a new tyre for your car. “Life happens to all of us, and we sometimes need money for these [expenses] at the most inconvenient times of the month,” says Wethmar. “Building a habit of saving can help you easily create an emergency fund for unplanned expenses.”

On the other hand, investing is when you spend your money on something that promises to create future returns, Wethmar says. You could, for example, use an everyday current or savings bank account to save up for a lump sum of money, and then invest that amount in tangible or intangible assets to grow over a certain period. Alternatively, you could invest smaller amounts on a more regular basis, which, over time, would grow thanks to compound interest. Use this guide to get started.

Below Wethmar discusses how the two habits differ:

Time

“Investment returns depend on financial markets, which can be quite volatile in the short term, but provide good returns over the long term,” says Wethmar. Therefore keeping your emergency savings pot in a short-term savings account would be a smarter move – you never know when you’ll need them for an unplanned expense.

When it comes to investing, you would set your sights on a future goal – like post-matric tuition for your child who’s currently in pre-school, or for your retirement 20 or 30 years away – and take advantage of this time span to invest in assets that offer slightly more exposure to market volatility, but the reward of growth the longer you stay invested. “These investments usually have a time horizon of at least five or more years away,” says Wethmar.

Risk

On the road to your financial goals, your money’s buying power is up against inflation, ie the general price increase of goods and services. So, where R100 could’ve purchased, say, two movie tickets at your local cinema 10 years ago, it can perhaps only just cover the cost of one now. That means you’d have to fork out double the amount of money to make the same purchase.

“The most significant risk with saving in a savings [account] is that inflation is more than your savings account return, decreasing your money’s buying power over time,” explains Wethmar. “You may be comfortable with this if you only save for a short period and need access to cash quickly.”

When you invest, you accept a certain level of risk – but with that comes reward: that of higher interest earned. “Investing has a bit more risk, as financial markets move up and down, driving the value of your investments,” explains Wethmar, “but the good news is that the risk of loss falls markedly over time.”

Accessibility

With the savings and investment vehicles available, you have a choice between shorter term and longer term accounts to grow your money in. Longer term investment options, like fixed deposits, often carry the limitation of your cash not being accessible until the account has reached its maturation date. What you sacrifice in not being able to access your money at short notice, you gain in higher interest returns. With a generic savings account at the bank, your money can usually be accessed within hours or days. “This ease of access comes at a cost and could give you a lower return than fixed deposits,” says Wethmar.

There are some investment vehicles that offer your capital exposure to higher growth potential, while still being more accessible than a fixed deposit. “For example, investing in a unit trust could allow you to have access within four or five working days, but you need to consider the risk and specific underlying funds to be withdrawn before making a decision,” says Wethmar.

For non-discretionary investments like saving for retirement in a traditional product such as a pension fund or retirement annuity, you would only be able to gain access to your funds after age 55 per product regulation.

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Saving vs investing: what to use when?

“You’d generally not want to take on too much risk if you save towards an expense that will be incurred within 12 months,” suggests Wethmar. So, if you’re saving for an emergency fund, or a holiday planned for a couple of months away, a savings account with lower risk would be a good option.

When it comes to planning for larger expenses – education, an international trip – investing can yield better results if you stay the course. “A three- to five-year plan could be to invest in a unit trust for a future overseas trip at low risk. You would like your money to grow with more than the bank’s interest rate. You can invest and receive dividends, interest and capital gains on your investment,” says Wethmar.

Then, for your longest savings horizon, ie retirement, investing in an account that accrues a healthy amount of inflation-beating interest is the goal.

Get the right expert on your side

A financial planner can lay out suitable savings and investment options for reaching your financial goals, whether they fall into the short-, medium- or long-term category. They know the benefits and limitations of a range of savings and investment products, so can help implement the right one, while looking at the time, accessibility, risk and tax implications in relation to your whole financial plan.

In conclusion, Wethmar puts it best: “It is important to speak to your financial planner, as saving and investing are habits that need guidance and nurturing.”

Book a meeting with a Sanlam financial planner to start your saving or investing journey today.