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There are two types of people: one who plays safe by saving and doing things that guarantee no risk and another who can go the dangerous route by investing, which usually holds some risk even if the person is extremely careful. You might have heard that no success is found without taking risks, but the market, time, and individual financial position significantly impact which route to take.
In general, saving is a very safe way of living but will hinder your ability to build wealth even if you have a high income. Investing is a way of compounding your saving by investing in stocks and real estate that can contribute to exponentially increasing your wealth.
To comprehensively compare investing and saving, we need to compare both across several metrics to determine which route best suits you. Those metrics are:
- Mathematical: How investing and saving look like
- Inflation: How the value of your money reduces with time
- Life: Consider your age, health and obligations
The following is a breakdown of all those metrics.
1- Mathematical difference: How investing and saving look like
The main difference between saving and investing is that saving is money earned by trading your hours for money minus ongoing expenses such as a mortgage, rent, household expenses … etc. While investing is capital that will bring a return back to the investor passively.
Saving is an active way of building wealth, while investing is passive. You only have 24 hours in a day, and you can only work around 10-15 hours. Even if you are in a high-income bracket, you can not work forever. However, investing in stocks or real estate is money that comes through without trading your time for work. With investing, you can make money while you sleep.
If you can save $10,000 in a year, you will save $200,000 in 20 years; however, if you invest that same $10,000 in an investment vehicle, that will bring 10% back to your invested capital (which is quite realistic to achieve), you will make over $630,000 in 20 years, your return on investment is two times more than your original invested capital. This means that saving is usually linear growth depending on your income and your lifestyle while investing is exponential growth.
| Year | Saving $10,000 every year | Investing $10,000 every year in an asset that will give you 10% back on your investment |
|---|---|---|
| 1 | $10,000 | $11,000 |
| 2 | $20,000 | $23,100 |
| 3 | $30,000 | $36,410 |
| 4 | $40,000 | $51,051 |
| 5 | $50,000 | $67,156 |
| 6 | $60,000 | $84,871 |
| 7 | $70,000 | $104,358 |
| 8 | $80,000 | $125,794 |
| 9 | $90,000 | $149,374 |
| 10 | $100,000 | $175,312 |
| 11 | $110,000 | $203,843 |
| 12 | $120,000 | $235,227 |
| 13 | $130,000 | $269,750 |
| 14 | $140,000 | $307,725 |
| 15 | $150,000 | $349,497 |
| 16 | $160,000 | $395,447 |
| 17 | $170,000 | $445,992 |
| 18 | $180,000 | $501,591 |
| 19 | $190,000 | $562,750 |
| 20 | $200,000 | $630,025 |
While investing is risky, we can not deny the power of compounding interest. Taking calculated risks is less risky than you might think. To learn more about minimising risk when investing, read: Beginners Guide To The Stock Market.
2- Consider Inflation: How the value of your money reduces with time
Inflation eats your buying power. The cost of living increases with time, and what you think you can afford today will certainly not be the case 10 years into the future. Many reasons contribute to increasing the cost of products and services. It is difficult to try to explain everything in detail, but we can simplify the reasons behind inflation with two examples:
- Increased demand for certain products, such as increased real estate costs due to more people wanting to own a home, contributes to increasing inflation.
- Governments print money, which reduces the currency’s value over time. What you can save in a few years, the government can print in a few seconds.
Saving does not protect against inflation, as inflation always increases, while saving does not. If inflation rises 2-3% a year, and you only save money, your money will lose 2-3% of its value every year. While if you invest your saving in assets that can bring higher than 2-3% annual return (which is quite easy to achieve), you have protected yourself against inflation.
While in the short term, inflation might not have a huge effect on the individual lifestyle, in the long term, inflation can severely impact one’s financial position. Therefore, investing can offer excellent protection against inflation.
3- Life: Consider your age, health and obligations
No dought getting old is something natural, and sooner or later, it will happen to all of us. We can either do nothing or prepare ourselves for it. Your skills will certainly decline with time, and eventually, your day job becomes harder and harder to do. This is where investing can help prepare you for retirement.
Your health is another factor that you must consider, and it is something that might not be predictable for most. At the same time, individual obligations increase with time, and humans will certainly have high financial burdens as they age.
Going with the safer route by only saving can be okay for most people, but life is not predictable, which is where investing comes in. You most certainly can lose money if you invest, yet taking a calculated risk can at least ensure that you are not just investing blindly.
This is a very serious threat and definitely stops many people from gaining financial freedom; for more, read: 9 Mind-Blowing Obstacles To Financial Success.
The Bottom Line
If you have read this far, you would have realised by now that saving has more downsides than upsides, while investing can help you build your wealth. Nonetheless, investing risks can not be ignored, and some mistakes can be deadly and set you back several decades of hard work. So what should you do?
You should have a plan. While investing might be a wealth builder, saving is excellent protection against hard times. The individual must evaluate his/her current financial position and determine how much they can invest. At the same time, they still have emergency savings that can protect the individual from selling those assets at a loss.
Financial literacy is the first step in this plan to prepare the individual to find excellent investment opportunities. To learn more, you can read a step-by-step plan on how to become financially independent.
It is important to note that financial independence is very difficult in the short term, and it is definitely a not get rich quick scheme, at least if we want to protect ourselves from huge losses. The main thing is consistency; once you have a plan, you need to be committed to it no matter how uncertain the market is in the short term; the long term should definitely be the focus.
