Difference Between Saving and Investing
Saving means putting money aside for safe keeping, investing means there is a risk that you will lose your principal amount.
Generally, savings are low-risk finance products like term deposits and savings accounts from a reputable bank.
Typically, you can access your savings at any time, at a minimal cost.
Are Savings Guaranteed?
Savings held in some Australian bank accounts and term deposits are backed by an Australian Government guarantee covering up to $250,000 per person per bank. That means, if your bank goes bust, the government may guarantee your savings.
You should check with your bank to see if your savings account or term deposit carries this guarantee.
2 Ways to Grow Savings
It might sound obvious (and it totally is), but there are only two ways to make savings:
- spend less, or
- earn more
If you can't earn more, you must spend less.
Consider this: If you can save $1 and invest it to earn 15% per year, after 20 years your $1 becomes $16... or $66 after 30 years!
Investing typically means taking risk for a better return. Common examples of investments include:
An investment can go up and down in value very quickly.
No-one, not even the experts on television or in the newspaper, can guarantee a return on an investment. No-one. Remember that.
Seriously, no-one can guarantee the return from an investment. So don't be fooled by anyone saying they can.
The closest thing to a guaranteed return is a Government bond or savings account... but even Government's can go bust.
How to Invest With Lower Risk:
- Educate yourself before you meet with an expert or invest
- Read books, blogs, or watch YouTube videos
- Ask questions - it's your money
- Ask: What are the risks? or How will I lose?
- Diversify your investments across shares, property, cash and fixed income
- Maintain 3 to 6 months of emergency savings in a safe place (e.g. savings account)
- Keep your insurance up-to-date. This is important.
Test Your Knowledge
Ben gets a $1,000 pay rise at work. Instead of buying a new 42" Samsung flat screen TV, he keeps his two-year-old Aldi TV and puts the money in a term deposit. Did Ben make an investment or savings?
A few months later, Ben is at a family BBQ when his uncle says, "Ben, you should buy shares in gold companies. You are young, and they are guaranteed to make a 10% return this year." Against his better judgement, Ben opens an online broking account to buy the shares his uncle recommended, hoping to make a greater return. Did Ben make an investment?
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