Saving vs. Investing: What is the difference?
It is time we finally put the age-old debate to rest—saving vs. investing, which is better? People have weighed the pros and cons of each. While it depends on personal financial goals, we will look at this question from the point of view of wealth creation and growth. In most cases, investing turns out to be the wiser choice between the two. There are various reasons why investing is wiser than leaving your savings in a bank account:
Compound Effect
Darren Hardy’s book, The Compound Effect, explores the idea of small improvements that amount to life-changing impacts. It is a simple idea often told with the following story or its variations.
A king challenged a sage to a game of chess, promising anything the sage desired if he won. Ultimately, the sage won. He asked the king to give him rice in such a manner that, starting from the first square on the chessboard, he would put down one grain of rice. Every subsequent square should have double the amount of rice grains than that of the previous one. So, one, two, four, eight, sixteen, thirty-two, and so on. By the time they reached the 20th square, the king had to give the sage 10,00,000 grains of rice. For the 64th square, the total came to 1,80,00,00,00,00,00,00,00,000 grains of rice.
Similarly, when you start investing early and consistently, your money multiplies. What initially seemed like an insignificant amount, like one grain of rice, has the potential to reap millions in return. We are not looking to replicate the doubling of money but the principle of growth through smart and steady investing.
Inflation
Savings accounts in the UK are notorious for their low-interest rates. You could argue that saving is more secure and stable. However, people usually ignore the effect that inflation has on savings. If your bank offers you 1% interest for a year and you deposit £1,000, by the end of the year, you earn £10 as interest.
Recently, the inflation rate in the UK reached its highest in 30 years at 5.4%. So, what you could have purchased for £1,000, will now cost you £1,054. Overall, you lose £44 to inflation. When pitched against each other, savings rates often lose out to inflation. While savings can provide you with a safety net to fall back on, they are rarely a way to build wealth.
Income and Wealth
These two terms are often used interchangeably. In daily matters, it doesn’t make much of a difference which word you use. However, there is a subtle difference that you must understand, especially when considering your finances. Income is generated from a particular source, usually in exchange for your work or investment. This is the means for day-to-day expenses. Wealth is the current market value of your assets, whether tangible or intangible. In this sense, income is much more transactional.
Income can be generated instantaneously but within a limited period. When you put your income to use to build assets, you create wealth. As a working professional, you may earn a monthly salary. At the same time, you might be putting away some money in assets, buying gold, a house, etc. Income is a means, and wealth is the result because the end goal when you retire is to have enough wealth that allows you to live comfortably.
Long-Term Gains
Investing is all about sticking through short-term volatility for long-term gains. It requires patience as well as discipline in the face of risks that you take on. Most experts recommend this strategy because while daily events cause fluctuations, it is usually upward-moving in the long term, minimising potential losses. Besides, pulling out immediately if things go bad is often a sign of investing with fear and not a strategy.
Moreover, it allows you to cut costs of investing and raise earnings from dividends. There is often tax associated with short-term investments. If an investor sells security within one year, the gains are calculated as normal income and taxed accordingly. On the other hand, holding out longer reduces cost. Warren Buffet has often been quoted on the value of time in the market and that is why people also talk about the importance of starting investments early; it gives you the luxury of time.
Hoxton Capital Management’s Investment Services
Having understood the crucial differences between saving and investment, along with some keys to the latter, you are probably considering starting your investment journey. Hoxton Capital Management’s investment services can help you. With a dedicated team of analysts, we offer tailored, expert investment advice. At a low cost, the services provide a thorough screening of funds to set goals tailored to your needs.
You receive a complete picture of your profile with regular updates and no hidden fees to worry about as Hoxton only uses ‘clean class shares’. Your personally assigned advisor strives to understand your needs and provide a consistent service. Take the next step in building your wealth with Hoxton Capital Management.
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