Saving is money set aside for future planned and unplanned (emergency fund) requirements; and the money must be easily accessible. For example, money in a 32-day notice account or a normal savings account.
Saving is important as it does not only create good money habits but having money that is easily accessible for a rainy day is one of the best ways to guarantee that you stick to your financial plan. However, most savings plans do not offer an interest rate of more than 6.5%, which normally does not even beat inflation, so effectively, your money is not working for you.
Investing on the other hand is buying an asset which you believe in the long-term will yield a high return, for example, purchasing an investment property or buying shares in a company. This forms part of your financial plan to build wealth.
As with saving, you need to have an investment goal, e.g. to earn rental income from your investment property, to invest for retirement etc. Since investing is long term, this is why one would expect a higher return. The higher return is brought about by compound interest. This is the true magic of investing. You can say compound interest is “interest on interest”, which simply means it is interest calculated on the initial amount invested and also on the accumulated interest of previous periods of a deposit. Compound interest allows a very average saver to become wealthy. Therefore it is really not about saving a heap of money; instead, it is about WHEN you start saving, so the earlier the better.
The example below shows exactly how starting early and compound interest work in your favour:
So start investing today! Even with a simple instruments such as Unit Trusts or Exchange Traded Fund. You will surely thank yourself later!
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