The Difference Between Savings vs. Investment: Everything You Need To Know

Savings and investments are two of the many terms you come across as an adult. What's the purpose of investing? What's the purpose of savings? To get a good grasp of these two terms and what their purpose is, first, we have to define them.

Savings and Investment

According to investopedia.com, savings are the amount of money left over after spending and other obligations are deducted from earnings. On the other hand, investment is the process of acquiring assets to build wealth and save money through income or appreciation.

What's the Difference?

One process involves just saving money, and the other involves buying assets and finding ways to earn to accumulate more wealth. But what about the money you keep in the bank? Doesn't your savings in the bank increase with time due to interest? Is that savings or investment? This is where the line starts to feel blurry.

If saving money helps me accumulate wealth, doesn't that mean I'm investing too? Well, no. The biggest difference between saving and investing is the level of risk that's taken. For example, the annual interest you get from saving a bank usually ranges from 0.5% to 4%, or at most, 10%, depending on certain conditions. Compared to investments where, with enough luck, you may double your money in less than a year, this is very minimal.

However, a bank's interest is pretty much guaranteed. As long as you save money and put it inside the bank, your money will gain interest. For investments, whether it's through the bank, other investment schemes, or you start your own business, there's a considerable risk. Your investments may not work out as you'd expect them to, the investment scheme may end up crashing, or your business won't be as profitable as you'd hoped it would be.

With that in mind, you may start to ask what the best way to accumulate wealth may be. Is it through savings or investments? First, we have to discuss their definitions and delve deeper into how they work to get an even better grasp.

The Benefits of Saving Money

To put it simply, savings is the amount of money you get from your income that you don't spend. There are plenty of ways you can save: From the simple methods of keeping a piggy bank or keeping all of the coins you accumulate throughout the day or through various savings plans with their own sets of benefits. You can consider high-yield savings, a guaranteed savings plan, and even high-interest savings plans.

The main purpose of savings is for people to have a financial "backstop" or to have a "just in case." At the same time, saving money can help you buy expensive things like cars and houses without loans, which in return helps you save more money without the interest on loans.

The Risk in Savings

However, this doesn't mean that savings also don't have risks. As macroeconomics would imply, savings with low-interest rates won't be able to keep up with inflation. This means that your money's value will depreciate over time depending on the bank rate. The difference between the years saving account vs. investing gets clearer because of this.

The Benefits of Investing

So what about investing money? Despite the generally high risks involved with investing money, many people seem to prefer it because of many factors. It can ensure that your money will continue to appreciate over time and your wealth will increase exponentially depending on the investments.

Regarding types of investments, there are several options, such as investing in bonds, stocks, businesses, and cryptocurrency, one of the fastest-growing markets today.

The Risk of Investing

Typically, the higher the amount of money you're expected to gain, the higher the risk will be too. Investment taxes are another thing to look out for also.

The Types of Persons for Savings and Investment

As is with many things, different types of persons prefer different types of set-ups. Are you an aggressive investor? Or the safe-playing saver?

Financial Security and Stability

Financial security and stability is also an important factor. At what age did you start saving? Are you able to enter retirement without any worries? Do you prefer the chance of being an extremely successful person over living a simple life?

Risk and Return Comparison

A risk and return comparison are a great way to gauge your best choice. Are you earning a lot in your day job? How much wealth do you plan to accumulate in a period? Will you be able to survive if your investments end up failing?

Balance and Combination

With all of that said, is saving or investing better? It really depends. Savings are great for people who prefer liquid assets for security, and investments are better for aggressive individuals looking to grow their wealth. Some experts also believe that diversifying, or allocation of funds between savings accounts and investments, is the best way to go. However, those are the opinions of others, and you should be able to come up with your own.

Success Stories

With a net worth of over $104 billion, Warren Buffett, an American business magnate, philanthropist, and notable stock market investor, is one of the many success stories investing in stocks. However, he started investing at the age of 11 and had a lot of ups and downs before he became who he is today.

In the crypto world, Changpeng Zhao is one of the names frequently used in conversations. Mr. Zhao, the founder of Binance, was only flipping burgers before he founded the biggest crypto exchange in the world, which now has $4.5 billion to his name.

Considering everything we've discussed today, there are so many paths to success. Savings are a great way to stay secure; they're much safer and will guarantee at least some form of interest. Investments are a great way to increase your wealth, but they also have significant risks that come with it.

Conclusion

Nevertheless, the path to success always starts when you decide to do something. Asking questions such as how much money to keep in savings and how much you should have to invest is a great way to start.