The Difference Between Saving And Investing

On the face of it saving and investing are the same thing. They are both things that we do with our spare money. But deeper thought suggests that there is a difference between them. Saving is almost an unconscious act where we put money into deposit accounts, or even an old jam jar on the mantlepiece, so that we have something for that proverbial rainy day. It is a way of giving our ordinary life a bit of security so that we don't find ourselves strapped for cash at some point. Investing is more of a conscious decision. It is about making plans for the future so that we know we can cope with expensive events like retirement or weddings.

When you save money your capital is secure. You are guaranteed to get back the sum you put in, plus interest. When you invest you have no such guarantee. Your capital is at risk. In return for this you expect to get more back than you put in, plus a little income on the side as well. So when you consider any investment you need to ask yourself two basic questions. How much more can I expect, and with how much probability?

But before you invest...

You need to be prepared. First of all, you need to get out of debt. By this we mean all debts apart from your mortgage, if indeed you have one. So you need to have paid off your credit cards and any personal loans you may have.

The reason is quite simple. It is unlikely you will make more from your investments than you will need to pay for your debts. So pay off your debts first. We can safely say it is the best investment you will ever make. Find out more in our Get Of Out Debt section.

Secondly, you need to have cash put aside for the aforementioned rainy day. How much cash is appropriate will depend on your circumstances. If you have dependents or if you are uncertain about your job prospects then you might want to put some more aside. One rule of thumb is that you should have enough cash set aside for at least three months' living expenses.

Last of all you need to be prepared to invest your money for a minimum of five years and preferably a lot longer. Although you can expect to get more by investing than saving, the value of your capital will fluctuate all the time. If you need to get it out in a hurry then you may not get a good price. If you want to use your money to put down a deposit on a house or buy a new car then investing is not the best way to do it. If you need a guaranteed amount of money within less than five years a high interest savings account is the most sensible option.