You have probably heard about the wisdom of putting something away for a rainy day from the time you were a kid. As a working adult, you can attest to the importance of having a kitty ready for an emergency or when ample opportunity presents itself.
When it comes to putting away a portion of your income, two options are available: saving and investing. Both have unique features and offer great benefits. A savings account is quick and easy to set up and allows you to have a separate kitty to store cash away from your checking account.
While some savings accounts accumulate interest, the rate will usually be much lower than what you get from an investment. An investment account will help you build long-term wealth that factors in the ravages of inflation.
The Pros And Cons of Saving
The primary function of a savings account is to have a reserve of cash you can bank on when the need arises. And this is a function they do well. When you need to stump up the cash for a hospital bill that your medical scheme doesnít cover, you can easily make a withdrawal. This is normally not the case with an investment. You will need to fulfill several conditions or wait for a required period before you can access the cash.
Yes, the returns are usually lower than what investment products offer, but you are at least guaranteed you wonít lose money with a savings account. The return you get on an investment depends on the performance of stocks, bonds, or exchange-traded funds (ETFs). The risk of loss is very real with volatile investment products.
Setting up a savings account is easy, and the initial deposit your bank will ask for is very low. A number of banks have even done away with the requirement to maintain a minimum balance. The value of money changes over time and most investment products will cushion account holders from this by adjusting for inflation. This is not the case with savings accounts.
You may save for years with the aim of raising the deposit for your first house, only to find yourself short when the time comes to make the purchase, as the value of your savings might be reduced by inflation.
The Pros And Cons of Investing
What draws many folks towards investment is the higher returns it offers as compared to savings. You can get up to 10 percent per annum on your investment depending on the product you choose and the performance of the market. You will be hard-pressed to find a savings account that offers 0.1 percent.
The level of interest investment accounts offer will cushion you against inflation, which has been hovering between one and four percent over the past year. If you were putting money aside to buy something, an investment would virtually guarantee that you will be able to afford it even if its price has gone up.
Your chances of beating inflation will only become better when you diversify your investment portfolio, as finance experts advise investors to do. The sheer range of investment options with different features means you can create a potentially high-reward portfolio if you choose wisely. Savings accounts donít offer such diversity.
However, a number of investment products are highly volatile, presenting investors with a high risk-high reward scenario. The unit price of stocks depends on the performance of the company behind them as well as external factors. A scandal involving some company executives can prompt a sharp dip in the unit price, causing you to lose your investment.
Meeting Immediate Needs†
Most investment products are structured in such a way that for you to enjoy higher returns, you need to leave your money for the long term. This means you may not be able to access those funds when an emergency crops up. Or, if you do manage to withdraw them, you stand to lose out on earnings. To mitigate this risk of loss, you can instead opt to apply for installment loans online to take care of the urgent need.
Which is Better?
The answer to this question will depend on you. You need to carefully consider your current and future financial needs before you put your money into either. If your resources are limited and you can envision needing the money soon, the savings option may be more suitable. If you have a bit of extra cash that youíre sure you wonít need in the immediate future, you can put it where the return potential is higher.
Have Your Cake And Eat It
You donít need to make a choice between the two. You can take advantage of both pros while mitigating the cons by having both. Open an account for both and grow the funds steadily over time to have both an emergency kitty and a long-term, higher-reward investment.
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