Most of us are less conscientious about our financial affairs than we should be and the question whether we’ve saved or invested enough usually crops up only when we’re confronted by a major life event – buying our first car or house, our wedding day, a big birthday, a divorce, a family emergency, an illness or even death.
We often don’t know whether we’ve planned sufficiently and set aside enough to offer us peace of mind.
My major life event was the recent birth of my first child – saving and investing suddenly became very real to me again. Thoughts of school and university fees and her wedding day all raced around in my mind. I need to secure her future and ensure she’s taken care of.
This article, the first in a series, looks at the basics of investing, to remind me – and all of us – of the importance of preparing for life’s major events.
Saving and investing aren’t the same thing
The first thing to realise is that saving is different to investing. Saving for a new car is very different to investing to achieve a long-term goal, like retirement.
Saving involves putting money aside, typically into a money market fund, fixed deposit account or even just your bank account. Saving is therefore relatively safe, with neither the risk of making a substantial loss nor the opportunity of making a large profit. Savings accounts and other low-risk options are a great choice for an emergency fund and short-term goals.
However, they’re not the best choice for goals with a longer time frame. This is because the return they provide is relatively low, usually less than the rate of inflation. If the return is less than the rate of inflation, it essentially means you’re losing money over time.
Today we’re faced with interest rates that are lower than inflation; therefore saving your money by putting it under your mattress, into your bank account, or money market fund will more than likely result in negative real returns. So generally, impressive returns are probably not likely through saving.
Investing, on the other hand, can help not only to create wealth but preserve wealth as well. By taking an appropriate level of risk, investors may have the opportunity to earn potentially higher long-term returns.
Investing is simply the act of putting money in a financial vehicle with the goal of making a return. So you’re basically making your money work for you. Successful investing requires both commitment and a plan.
Article by Leigh Köhler, Head of Research at Glacier by Sanlam