You do everything you can to grow your savings. So every time you receive your paycheck, a percentage of your income goes straight to your savings account. You then proceed to budget what’s left of your money to pay for groceries, bills, and other needs. If you use your credit card for big ticket purchases, then you must also set aside money to pay your dues.
Most financial advisors would recommend that you allocate 20 to 30 percent of your income for savings, but it really depends on your financial goals. But if you’ve already developed the habit of saving, then you deserve a pat on the back because what you’re doing is actually a sound financial move.
Savings and investment: What’s the difference?
Responsible and effective financial management always begins with having a definite financial goal and following it diligently. Whether your goal is just having enough resources to fund your dream.
trip abroad or to prepare for retirement, it always involves either preserving or growing your hard-earned money.
Most people count on just having savings to fulfill their long-term financial goals thinking that their money is safely-tucked and well-preserved in their savings account. There’s also the concept of investing your money, but some people shun the idea because they are afraid of losses due to risks.
But did you know that you can lose money not just when you invest, but also when you keep your money in a savings account? It’s time to clarify the difference between saving and investing and be aware of the factors that makes one a better choice over the other.
Time, they say, is one of the most valuable assets everyone has. Hence, the difference between saving and investing lies largely on the length of time you can set aside your money. For savings, your money is readily accessible to you and can be withdrawn almost anytime.
If you are pooling resources for short- or medium-term goals, like the downpayment of a car or a house, it is advisable that you opt for savings. But if you are aiming something long term, like preparing for your child’s college education or your retirement, then investment can be an option for you.
Remember the basic rule: for long-term financial goals, consider investing. For short-term goals, savings works best. Why? It is because time may either depreciate or appreciate the value of your money, which leads us to our next point.
Value of money
Why is savings good only for short-term financial goals? It’s because your money decreases in value if it is just deposited in a savings account for a long time.
You may wonder, shouldn’t I be earning money through the interest rate of my savings account? If you consider inflation, among other factors, which often outpaces the interest rate offered by your savings account, your money in a savings account may lose value over time.
Most banks in the Philippines offer 0.25% annual interest rate for their savings accounts. Now, let’s do the math. Let’s say you deposited PhP 20,000 in a savings account that would enjoy the same 0.25% interest yearly. In 20 years, you may have grown your initial deposit to PhP 21,0001, before withholding tax.
Now, if you factor in inflation, the Philippines’ inflation rate is regularly fluctuating, but historically, it could go as high as 50.3% as how it was in the 1980s2. Just placing the interest rate per year of your savings account to the inflation rate, you will notice the large gap and conclude that the earnings of your money in a savings account could be eroded easily by inflation. In just a year, your initial PhP 20,000 deposit would have lessened its purchasing power because your money stayed roughly the same but the inflation has driven the prices of goods and services up.
In terms of maximizing your money’s earning potential, investing puts you at an advantage. While there’s bigger risk involved, investing does not let your money sit idly. It allows you to grow your money through strategic purchasing of stocks, bonds, and other investment vehicles. If you put the same amount of PhP 20,000 in a fund with a historic average of 10% annual earning, in 20 years you may get as much as PhP 146,561.47.3 Despite the inflation slightly eating the value of your money, you still end up having more.
If your money’s safety and liquidity are your primary concerns, then savings remains your option. But if you are looking to earn more, investing may give you bigger returns despite its risks. You may hear from your friends that investing is a “high risk, high reward, low risk, low reward” endeavor.
The good thing about investing nowadays is that there are professionals who are ready to help you manage investment risks through investment planning, diversification, among other risk management methods.
Opting for either savings or investment is a matter of being clear about your financial goals and risk appetite. We go back to the basic rule that savings works best for short-term financial goals, while investment for long-term financial goals. Not knowing the difference between savings and investment and the purpose of each might leave you losing money in the long run
1 Compound Interest Formula: Amount = Principal (1+Annual interest rate in decimal/Number of times interest is compounded per year)Number of times interest is compounded per year x Time
2 Philippine Statistics Authority. Trends in Inflation Rates by Region. https://psa.gov.ph/sites/default/files/TAB11-2.PDF
3 Assumed earnings based on 10% interest over 20 years. The projected earning is not guaranteed as historical performance does not guarantee future returns.