If we are lucky enough to have some extra money available to either save or invest then we may wonder which is the best option for us. There are some big differences between saving and investing and it is wise to know what the differences are so that you are sure you are making the right decision.
With a savings account you are unlikely to get a very big return on your money. You will usually get a few percent lower than the prime rate or if you are happy to tie the money up for a while you might get a bit more. You may get a bit more than inflation but this will depend on whether you find a good rate or not and whether you tie the money up or not.
With an investment the potential return can be greater. The money is used in a very different way. Instead of being given to a bank for them to lend to others and in return they give you interest, you will actually purchase things with the money. This could be stocks and shares, parts of a company or even artwork. The money invested will increase in value if the items that are bought with it are deemed to be more valuable. The amount they increase will therefore depend on what is invested in.
With savings the risk is very low. The money that you put into the bank should be safe and you will be able to get it when you want it. Some types of savings are higher risk than others but they are still generally all very safe. The chances of you not being able to get your money back is very low. There are some accounts such as government bonds that will be even safer.
With investments there is more risk. The item that you buy may go down in value and therefore if you want your money back you may find that when you sell it you get less back than you put in. There could even be a risk that there will be no value at all. With some investments there is even a risk that you will have to pay out more money than you have originally invested. There are different levels of risk with different investments though. This means that you should be able to choose an investment that carries a risk level that you are happy with. It is often the case that you will find that the lower risk investments will not have such a high return as the riskier ones. This means that you have to decide whether you are prepared to take a higher risk in order to get a better return or whether you would rather take less risk and have a lower return. Many people would consult with a financial advisor so that they can get advice as to what different investments are like and what level of risk they have.
With many savings account you can keep the money in for as long or little time as you wish. In an instant access account you can draw it out at any time. With some accounts you may have to give notice that you will be withdrawing it or even tie the money up for several years. However, these are still short-term arrangements.
With investments you might be able to sell the items as soon as you wish. However, there may be fees associated with this and so if the investment has not grown in value very much, it may cost you too much to cash it in, as you may end up getting charged more than the investment has gained in value. In fact, when you make an investment it is usually advised that you hold onto it for at least five years if not ten or more to make sure that it has sufficient time to increase in value. The value is likely to fluctuate up and down over time by a small amount so by leaving your money invested for the long term, you will be able to get past those small fluctuations and hopefully see it rise significantly. Of course, there is always a risk that it may go down rather than up.
So, although the terms savings and investments can be used interchangeably at times they are very different. You will need to be prepared to lock your money up for a long time if you want to gain significantly from an investment and you will take a risk and may not gain anything. With savings you will not gain so much but you will often be able to get your money immediately and there is very little risk. Therefore, with an investment you should be using money that you are prepared to lose, whereas with savings you can be surer that the money will be safe.