Saving and investing are two critical tools that you can use to build a solid financial future. However, they differ in terms of their purpose, risk, and liquidity. Understanding these differences allows you to choose the right tool for the right job and make the most of your money.
Let's clarify the characteristics of saving and investing, discuss when it's typically the right time to do one or the other and review your investment options.
| Saving | Investment | |
|---|---|---|
| Return potential | Typical deposit interest rates are currently lower. Other investment options provide the potential of a higher return over the medium to long-term. | Investments have the potential for higher returns than a savings account over the longer term. They are more likely to outperform inflation. |
| Risk | Involves minimal risk. | Investing does not guarantee a return, and losing some or all of the funds is possible. The longer your investment time horizon and investing in a diversified portfolio helps reduce investment risk. |
| Access to money | A savings or deposit account gives you access to your cash when needed. Some deposit accounts restrict the amount, frequency or notice required to withdraw. | When you invest your money, you may not have access to it for a set period, or it can take a few more days or weeks to access your money compared to a savings account. |
| Suitable for | Building a short term emergency fund or meeting short-term financial goals such as paying for your wedding. | Investing can help you reach long-term goals, such as paying for a child's education or planning for retirement. |
Should You Save Or Invest Your Money?
Saving and investing contribute to your general financial wellness, but they do so differently.
When You Should Save
If you have short-term financial goals or need to store away money for emergencies, you should put money into savings. Let's look at a few scenarios where it may be more beneficial to consider putting your money into savings rather than investments:
You haven't built up your emergency fund
An emergency fund is about 3 to 6 months' worth of your living expenses in a savings account that you can access in an emergency. An emergency fund can prevent you from going into debt if certain situations arise, like losing your job or getting hit with expensive medical bills. Establishing an emergency fund before investing is a good rule of thumb.
You'll need the money within five years
If you're saving for a mortgage deposit, wedding, or other large purchase you'll make in the short term (3 to 5 years), you should keep some money in a savings account.
You need to pay off high-interest debt
High-interest debt can continue to be a financial burden the longer it takes to pay off. You can get a better return by paying off credit card or other high-interest debt rather than investing the amount you owe.
When You Should Invest
Typically, you'll want to invest for long-term goals, ones that are at least 5 to 10 years away. The longer you keep your money in investments, the more time you have to ride out the highs and lows of the stock market and end up with greater returns.
Here are some instances when it would probably be a good idea to invest rather than place your money in a savings account:
You don't need the money in the short term
If you have an established emergency fund and can afford to be patient, it likely makes more sense to invest instead of saving.
You're paying off low-interest debt
Unlike high-interest debt, you can focus on investing with low-interest debt such as mortgages. It doesn't hurt to pay off the low-interest debt first. However, earning returns on your investments and maintaining your low-interest debt payments is possible. Just make sure your budget allows for it.
You have long-term goals that require a high return on investment
Investments can be helpful for significant expenses that occur down the road. Suppose you're planning for retirement or a child's college education. In that case, you'll likely want to invest for several years. A long-term investment can offer a greater reward than savings, although trying to save some money for these milestones is a good idea, too.
Understanding the long-term potential of investing
The Regular Investors (Savings Plan or Childrens Savings Investment Trust)
Peter and Jane have decided to invest €140 a month into Aviva’s Savings Plan. The following table shows what their education savings value could potentially be worth after 10, 15 and 20 years.
| Low to Medium Risk Fund - 3.15% per year growth | Higher Risk Fund - 5.75% per year growth | ||
|---|---|---|---|
| Estimated Education Fund Value | After 10 years | €17,561 | €18,989 |
| After 15 years | €27,173 | €30,687 | |
| After 20 years | €37,365 | €44,019 |
Source: Aviva January 2024. Peter and Jane are hypothetical and do not represent any investors experience. A gross investment return of 3.15% per annum is assumed in the above calculations based on the Fixed ESG 20 Fund. A gross investment return of 5.75% per annual is assumed in the above calculations based on the High Yield Equity. The figures shown allow for 1.15% Annual Management Charge deduction for the Fixed ESG 20 Fund and 1.25% for the High Yield Equity Fund. On encashment, partial encashment, assignment, death or on each 8th anniversary of the policy, tax is deducted on gains made. The figures shown allow for the deduction of tax (currently 41%). These returns are not guaranteed. The actual returns will depend on many factors, including the prevailing market conditions. You can find the actual performance of these funds on the fund centre on aviva.ie.
The lump sum investors.
Let’s say Peter and Jane invest €10,000 that has been on deposit earning a low rate of interest. The following table shows what their lump sum investment could potentially be worth after 10, 15 and 20 years.
| Low to Medium Risk Fund - 3.15% per year growth | Higher Risk Fund - 5.75% per year growth | ||
|---|---|---|---|
| Estimated Education Fund Value | After 10 years | €11,509 | €13,456 |
| After 15 years | €12,420 | €15,737 | |
| After 20 years | €13,388 | €18,331 |
Source: Aviva February 2024. Alice and John are hypothetical and do not represent any investors experience. A gross investment return of 3.15% per annum is assumed in the above calculations based on the Fixed ESG 20 Fund. A gross investment return of 5.75% per annual is assumed in the above calculations based on the High Yield Equity. The figures shown allow for 0.9% Annual Management Charge deduction for the Fixed ESG 20 Fund and 1% for the High Yield Equity Fund. On encashment, partial encashment, assignment, death or on each 8th anniversary of the policy, tax is deducted on gains made. The figures shown allow for the deduction of tax (currently 41%). These returns are not guaranteed. The actual returns will depend on many factors, including the prevailing market conditions. You can find the actual performance of these funds on the fund centre on aviva.ie..
Conclusion
Regardless of your chosen tool, starting early and being consistent is essential. Set a savings goal, contribute to it regularly, and consider automating your savings to make it easier. Similarly, if you choose to invest, diversify your portfolio, and monitor your investments regularly with the help of your financial broker.