Videos | January 6, 2012

What are the pros and cons of saving and investing?

There are two main ways to reach a financial goal - saving or investing. It's that simple. Both present much better prospects than pinning hopes on hitting the lottery jackpot.

Saving is slow and steady, while investing is not always predictable
The Be Good at Money video tutorial compares saving and investing to a tortoise and a hare having a race. The savings tortoise makes its way towards the investment goal at a slow and steady pace by regularly putting money aside and earning interest. But it has difficulty reaching the goal quickly, particularly with inflation added to the target. Meanwhile the investing hare might race towards the investment goal "but is not always predictable". It can vary in pace and even move backwards at times.

Be aware of inflation eating into savings
Saving is largely considered safe but given the slow pace of growth, savings risk being eaten away by inflation. Savings interest rates tend to move in tandem with what is happening in the broader economy. As detailed in the eZonomics video How to protect your savings from inflation, if the savings interest rate is lower than the rate of inflation, you're losing money. Tax and the build up of inflation over time can make reaching a goal challenging. Knowing the rate of inflation is an important part of the savings puzzle.

Consider your appetite for risk in investments
Investing in the likes of shares, bonds or funds offers the chance to reach a financial goal faster than through savings alone. But investing automatically takes on more risk. The value of an investment - be it a share, bond or mutual fund - can fluctuate and the ups and downs can be sudden and dramatic.
In the tortoise and hare story, the investment hare can jump ahead quickly but can also go off track and run the wrong way.
Risk levels vary between different investment products and knowing your appetite for risk can help weigh up whether saving or investing (and what type of investing) is best for you. Likewise, knowing the length of time you intend to invest can be useful as under the lifecycle approach, investors reduce risk the closer they come to their investment goal. Even if you have a high tolerance for risk, ensure you understand an investment before buying. After all, it's possible to lose money on "low-risk" investments, such as bonds.

InvestingSavingSharesRiskBondsInflationLife cycleCash Funds

eZonomics team
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