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Savings vs. Investments - The Differences

Posted April 5, 2013 by Scott Bryan to Investing 0 0
This post was written by a EasyFinance.com Community member. The views expressed below may not reflect the views of EasyFinance.com.

Many people are of the opinion that savings and investments are one and the same and you may be one of those individuals. However, there are a few subtle differences so let’s have a look at these in a little more detail.

Savings

In very simple terms savings tend to be spare monies that you put to one side to cover such things as that “rainy day” situations, should an emergency occur. For instance, your car may fail its MOT and require a substantial amount of money spending on it. You may also save towards a holiday that you have planned in a few months’ time or towards paying for a celebration such as a wedding.

Therefore, savings tend to be towards events both unexpected and planned that take place over the short term i.e. perhaps a few months or in a couple of years’ time.

So, where should you save your hard earned money? Some people, quite literally, save any spare coins in a large jar that is very much an informal arrangement. Up to an extent, that is fine, but the downside is that they are not earning any interest on their capital. Others may open an instant access deposit/savings account at their bank, building society or the Post Office and, periodically, pay funds into the account.  At least with this type of account they will be paid interest albeit at the moment instant access savings account interest rates are very low. These types of savings accounts carry no risk to losing your capital.

Some people will regularly transfer funds from their bank current account into their savings account by way of a standing order. In this way they get used to the idea of setting money aside on a weekly/monthly basis. Should they require funds out of their instant access savings account they can usually just transfer the amount required directly into their current account either by contacting their bank or doing it themselves online.

However, having said all the above, you could set up a savings plan whereby you are saving on a monthly basis in a stock market based investment like unit trusts. In which case, those monies should be viewed as being saved for at least five years to, hopefully, iron out any ups and downs that often takes place within equity based products as you are risking your monies. Saving over the longer term tends to be for things like planning well ahead for your retirement.

Investments

There is much debate about what constitutes an investment. It tends to involve investing a reasonable lump sum over a period of time rather than saving smaller amounts on a regular basis for easy access. Having said that, the lump sum could be as little as £100.

Some would say that the minimum term that you invest for should be for five years or more and that you invest your money in the stock market or commission certified professional organisations that invest your money in the stock market. However, some people are of the opinion that an investment could also be a one-year fixed rate bond with your bank or building society where you have not put your capital at risk. In fact, both of these are investments. It is money that you have set aside that you will not need access to until sometime in the future. If you require access to the funds sooner than anticipated there may well be a financial penalty to do so.

Investment vehicles could be things like bonds, stocks and shares, unit trusts etc. The theory is that by investing in stocks and shares you should achieve a higher return than placing funds in a savings account.

Hopefully, the above has explained the differences between savings and investments but the best thing that you can do is to seek appropriate advice from a financial adviser who will be able to guide you in the right direction.

About Scott Bryan: Scott Bryan is a financial blogger who enjoys explaining the arcane world of finance in everyday terms. Formerly a high street bank manager for over thirty years, he knows that everyone has unique requirements and so is dedicated to helping you find the right solution for you. He now works as a freelance financial writer when not consulting for Profile investment portfolio management software.

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