Saving Vs. Investing: Which & When To Choice, And Why?

There are two types of people: one who plays safe by saving and doing things that guarantee low losses. In contrast, others 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; however, the market, time, and individual financial position significantly impact which route to take.

In general, saving is a very safe way of living and might 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:

  1. Mathematical: How investing and saving look like
  2. Inflation: How the value of your money reduces with time
  3. 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 ours 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, this is two times more than your original invested capital. This means that depending on your income and your lifestyle, saving is usually linear growth while investing is exponential growth.

YearSaving $10,000 every yearInvesting that $10,000 every year to bring a 10% return
1 $10,000 $11,000 
11 $110,000$203,843
18  $180,000   $501,591
Investing Vs. Saving

While investing is risky, we can not deny the power of the 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 a few examples:

1- Increase demand for certain products, such as an increase in real estate cost due to more people wanting to own a home, contributing to increasing inflation.

2- 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.

Therefore, saving does not protect against inflation as inflation always increases, while investing does. 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 bases, inflation might not have a huge effect on the individual lifestyle, in the long term, inflation can have a severe impact on one’s financial position. Therefore, investing can offer excellent protection against inflation.

3- Life: Consider your age, health and obligations

There is no dought that 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 your 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, the individual obligations increase with time, and certainly, humans will have high financial burdens as they get old.

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. For more details, read 10 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 current financial position and determine how much he 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 independency 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.

Recent Posts