Is investing a better alternative to saving?
Saving and investing are two favoured ways to make money. Individuals often debate over which one is better. From a bird’s eye perspective, having a savings plan means setting money aside in a safe place with the intent of not spending it, while investing is utilising that money to make more money. However, the better option depends on your investment goals. It would be best to research each option to determine which one suits your needs best.
What are the benefits of investing?
Investing offers the potential to make more money
If you had SGD1,000 and put it in a savings account earning 0.01% interest, after one year, you’d have SGD1,001. But if you invested that same SGD1,000 in a stock that returned 7%, your investment would be worth SGD1,070 after one year.
Investing can help you reach financial goals quicker
Investing offers the potential to grow your money faster than saving alone. For example, let’s say you want to save for a down payment on a home that costs SGD300,000. It will take nearly nine years to reach your goal if you earn an 8% investment return. But if you only earn a 0.5% return on your savings, it would take approximately 60 years to reach your down payment goal.
Investing can be a hedge against inflation
When the cost of living rises but your savings account interest stays the same, that’s called inflation. Inflation can destroy the buying power of your cash. For example, if inflation is 2%, and you have SGD10,000 in a savings account earning 0.5% interest, after one year, you’d have SGD10,050. But because of inflation, that extra SGD50 would only be able to buy the same amount of goods and services that SGD10,000 could purchase before inflation.
Investing offers the potential to earn a higher return than the rate of inflation, which means your investment could grow faster than the cost of living.
You can start investing with a small amount of money
You don’t need much money to begin investing; some platforms allow you to open an account with as little as SGD5. After opening an account, you can start buying investments for as little as SGD1.
Investing offers diversification
When you invest, you can spread your money across different types of investments, known as diversification. Diversification helps manage risk by allowing you to own a mix of investments that may react differently to the same market conditions.
For example, if the stock market falls, investments that tend to do well in a down market, like bonds, can help offset some of the losses in your portfolio.
Benefits of saving
Savings can provide a safety net
An emergency fund is a key to financial security. It’s money for unexpected expenses, like a job loss, medical emergency, or home repairs. An emergency fund acts as a shield between you and debt. Ideally, you should have three to six months of living expenses in an easily accessible account, for example, a savings account, money market account, or short-term certificate of deposit (CD).
Savings can help you reach specific financial goals
A savings account is excellent for stashing cash for short-term financial goals, like saving for a vacation, holiday gifts, or a down payment on a car. The sooner you start saving, the easier it will be to reach your goal. Even if you can only save a small amount each month, it will add up over time.
Savings can earn interest
Unlike investing, which comes with the potential to lose money, savings is a low-risk way to grow your money. You’ll earn interest on your balance when you deposit money into a savings account. The interest rate varies depending on the type of account and the financial institution, but it’s typically higher than the inflation rate. That means your savings will grow and keep pace with the cost of living.
You can access your money when you need it
A significant advantage of opening a savings account is having easy access to your cash. Unlike investments, which can fluctuate in value and may be subject to fees or penalties for early withdrawal, you can typically withdraw money from your savings account without penalty.
