Terms such as saving or investing are regularly used almost as synonyms, but in reality they are different concepts that, whenever possible, should guide the management of your personal finances.
We usually see savings as something that can be achieved by being careful with our spending and taking advantage of promotions and other offers. On the other hand, we see investment as something that moves millions of euros and that is only within the reach of those with “fat” bank accounts.
The truth is that, nowadays, both are relatively accessible , although in different proportions, as they depend on each person’s possibilities. Thus, in general, experts suggest that savings should be viewed as something to be applied in the short term , while investment is a solution with long-term application.
Saving or investing: what separates them
Simply put, saving does not refer to the ability to avoid expenses or look for promotions , but rather to investing money in financial products with specific characteristics that allow the amount to grow over time, but that are safe and ready to use when needed.
On the other hand, investment refers to investing money with the specific purpose of making it grow , and there are hundreds of different types of investment, with greater or lesser risk. Experts suggest long-term investments due to potential declines over time.
Where to start?
When it comes to saving or investing, the best option is to start with savings , first and foremost by creating an Emergency Fund. Knowing how much you need to save to have a good nest egg depends on your goals, and experts believe that you should have between three months and a year of expenses saved up in case you become unemployed, for example.
These savings could be invested in products such as term deposits, savings certificates , or capitalization insurance without penalties at the time of redemption . These products stand out for providing easy access to the money saved and for the guarantees offered, which give them security.
By making an emergency fund, you are laying out the establishment for long-term investments with the affirmation that the cash will cover any short-term problems.
When it comes to investing, it is important to understand that being an investor is a learning process that never ends . In the short term, the values of more complex and/or risky financial products can go up as well as down, but in the long term there are products that have historically yielded results .
Save or invest?
Understanding how different investment types work, how to get to them, and how to collect a financial planning portfolio is fundamental to see an ascent in your money later on. By and large, investment with a higher potential return generally has a higher gamble of losing money.
Your willingness to accept a risk is wholly your own decision. While some investments are relatively high risk and can result in financial loss but also huge rewards, others are low risk and generate poor returns. In these cases, it is important to limit losses without limiting gains. This can be done, for example, by choosing to allocate a small percentage of your investment portfolio to higher-risk products.
Investing, it should be noted, does not mean buying properties for large sums or making large financial movements. For many peoples, investing simply means saving what they can in a Retirement Savings Plan (PPR) , a solution that has certain tax benefits associated with it.
How Risk Changes Everything
Therefore, the big difference between saving and investing is the risk associated with the financial products in which we invest our money. Savings products such as savings certificates, term deposits, and capitalization insurance are insured by the State or solid insurance companies, so the risk is low.
The return is minimal as well because of the low risk. Even if the money you have saved might only yield a little return, you know that you will always have it ready for use. Even so, be informed because some of these products may have periods when you cannot use the money, and you should manage your funds according to these criteria.
With investment products, there are no guarantees about the money you invest . The historical results of many companies and funds are positive, but in the financial world it is believed that past performance does not guarantee future results. Furthermore, for every success story, there is a failure story.
Investing wisely and with a long-term focus can help you grow your invested money significantly. A common strategy in investment products is to also invest a fixed amount every month , in order to offset, even slightly, market volatility.
Complementary savings and investment
Although it is not always possible, it is ideal to be able to supplement your savings with investments. The first step will be to create a nest egg before putting a single cent into riskier products.
This nest egg, invested in safer products that yield less income, will never grow significantly – nor is it intended to do so. The money invested to grow significantly goes into investments.
However, it is possible to have high-value investments in several markets and live “tightly” until the end of the month if you do not have the aforementioned good nest egg. If an investor has a short-term problem, at a time when the markets are down, he may be forced to withdraw his investments even if he loses money.
The value of these same investments could increase, but without the savings created to cover a short-term expense, the investor is forced to accept the loss . Again, we emphasize that savings protect you in the short term, while investments are intended to grow your money in the long term.