Saving vs investing: A guide

What’s better, saving or investing? It’s a good question with an interesting answer, especially as the differences between saving money and investing money are typically not well understood. Saving and investing are not the same, but they both come with their own potential benefits and risks, and each may play a useful role in helping you work towards your financial goals over the long term. Read on as we look at the differences between saving and investing.  

What’s the difference between saving and investing?

When you save money, you’re putting it into a bank account like a personal or savings account, or a term deposit. When you put your money into a savings account, it can grow because of the interest rate the account offers. Interest is compounded daily, monthly, quarterly or at some other time. This means that money can earn interest on the interest the money has made from the initial deposit.

When banks and term deposits offer interest rates that are higher than inflation, money may grow over time. But when banks offer lower interest rates than current inflation levels any small gains that money may earn could be eaten up by the rising cost of living. This would mean, when you put money into savings it may take longer to grow, if at all.

When you invest money, you’re buying an asset that you think may have the potential to increase in value over a long period of time. The most common investments are real estate, gold, bonds, and shares in companies or exchange traded funds ETFs.

Investing is more accessible now than a decade ago because of online retail investor platforms like Hatch. Not only can you get access to global markets without expensive brokers in the middle, but the broker and exchange fees are lower now than they have been previously. With investment platforms like Hatch, you don’t need to have a large amount of money to get started either. And you may choose to make small, weekly deposits to build up your investment portfolio over a long period of time.

The real difference between saving and investing

Let’s do some maths. Say you have $10,000 sitting in a savings account. You’ve planned to set aside another $500 a month with the hopes of growing your money over the next 30 years. Let’s look at the options of saving vs investing that money - putting the money in a ‘high interest’ savings account, like a term deposit vs investing it in the share markets. Try this calculator from Sorted.co.nz that we used to do our calculations.

Option 1: Save it

Using a term deposit rate of2% (which was among the best on offer back in September '22 when we wrote this). If you deposit $10,000 then save an additional $500 each month, in 30 years you’d have around $145,606.

Option 2: Invest it

The share markets have grown investors’ money by a historical average of 10% per year since 1957. If you had invested your $10,000 in the share markets between 1957 and 2021 and had invested an additional $500 a month within that time frame, within 30 years on the average 10% return that initial deposit could have grown to around $665,751. That’s a difference of $520,145.

How to save and invest

Before starting to invest, it may be wise to set yourself up with a financial buffer. This can include paying off debt, stopping use of credit cards and buy now pay later schemes and having an emergency fund that you can access quickly and simply.

1. Pay off debt

Paying off all your consumer debt from credit cards, loans and buy now pay later schemes (but not necessarily your mortgage) and creating healthy money habits will give you a clear financial foundation to decide whether you want to invest.

2. Save an emergency fund

Saving money should always come before investing money. Start an emergency savings account, aka a rainy day fund that you can access quickly and simply to use in case of unexpected life events (no, a shoe sale is not an emergency). Kiwis aren't known for being the best savers, but you’re advised to have enough to cover any sudden costs, like your car needing work or a bill you weren’t expecting. 

Sorted recommends stashing aside $1,000 as a start to give yourself a financial safety net, then continuing to add to it regularly over time. Yes, it’d be nice to have 3-6 months set aside but you may decide to build it up slowly while also putting some money into investing. The goal of this kind of savings - your emergency fund - probably isn’t to grow your money; it’s to store it in a place other than under your mattress for things you may need in the short term.

3. Start investing

Once you’ve got a financial foundation and removed debt, you can breathe a little easier knowing you could probably cope with an emergency. That breathing room is important, because you never want to be in a position where you need your investment money in a hurry. Share prices are volatile in the short term, so any money in investments is probably not something you’d want to access in a hurry. To work out how much money you should invest, In Investopedia’s four financial planning steps, financial planners suggest working towards investing around 10-15% of your annual income. But starting with smaller amounts (once you’re debt-free) can be a way to assess your risk tolerance and find out if investing is for you. 

Many Hatch investors start with investing $100 - the price of a dinner or two out. Once you understand your risk tolerance and learn more about the share markets, you may choose to slowly add to your investments as you build your confidence over time, while adding to your emergency fund. Ready to learn more about investing? Try our free Getting Started Course to learn about risk and how share markets work.

Saving vs Investing

Knowing the difference between saving and investing could be the difference between living your best life, and saving yourself poor. Savings is about storing money and investing is about growing it over time. Our ex-Head of Experience, Natalie covers off the basics and why it's so important to understand the difference, as well as know when to save and when to invest.

‍

‍