What Makes Savings Different From Investments?

So, you have some extra money (although, how can they be extra?). Now the question arises, how to preserve them? You can choose between two paths — to save them in one way or another, or to invest. And both options have their advantages and disadvantages. So, which one to prefer? What makes savings different from investments?

A Few Words About Savings

When it comes to savings, it’s not about gathering a couple of thousand dollars, putting them in a bag, and burying them in a secret place. And then regularly adding more bundles of money to the bag and happily watching it grow thicker and thicker. Today, anyone who wants to save money uses bank accounts or deposits.

The first method is the most convenient because it provides quick access to money. However, it differs little from cash in a bag. After all, interest on bank deposits is small, and inflation, even if its rate is not very high, slowly and inexorably reduces the real amount.

The second option may seem more preferable. Interest on time deposits is significantly higher and usually covers inflation. However, money can only be obtained upon expiration of the contract term, and if terminated prematurely, the interest will be lost.

In addition, bank deposits are preferable in terms of financial security. Their return is guaranteed by deposit insurance agencies or various insurance funds. Although they compensate only a certain amount (for example, up to $20,000), for many depositors, this is a sufficient argument.

Thus, we can talk about the advantages and disadvantages of savings. Among the advantages of this approach to saving money are:

• Safety. Nowadays, deposits are insured by the state or private funds. Moreover, the risks of depositors of reliable banks almost tend to zero.
• Transparency. Banks inform in advance about the interest on the deposit.
• Access to money. The depositor can always withdraw the entire amount (or part) of the deposit if not otherwise provided by the contract with the bank.
• Minimal expenses. Bank account maintenance fees are low, and if the amount on the account is large enough, there are none at all.

Among their disadvantages are:

• Low return. This means that it is practically impossible to earn. Not even the complete preservation of funds is guaranteed.
• Inflation risk. With low profitability, the process of money depreciation is particularly noticeable.

About Investments

Investing is commonly understood as putting money into ventures with the aim of generating income. For example, investments include:

• Investing in one’s own business for its development.
• Purchasing stocks and bonds that yield interest (dividends and coupons) or speculative income (due to the appreciation of securities).
• Buying tokens of cryptocurrency startups, etc.

An investor allocates funds with the expectation of obtaining significant returns. Their goal is not just to preserve capital but also to increase it. Interest rates in investing can be calculated in percentages ranging from tens to hundreds. However, there are no guarantees that everything will go as the investor hopes. They can either significantly increase their investments or lose part or all of their capital. This indicates that investors’ risks are quite significant, at least greater than those involved in saving.

Risk reduction can be achieved by selecting assets. For example, if only bonds are purchased, risks are significantly reduced because debt securities guarantee the return of the nominal value. Another option is portfolio diversification, where returns from some investments compensate for losses from others. However, by reducing risk, the investor also loses in terms of profitability.

Advantages of investing:

• Profitability. Investment instruments, such as stocks, can yield much higher returns than savings accounts.
• Liquidity. Securities are usually highly liquid and easily convertible into cash.
• Protection against inflation. An investor with a widely diversified portfolio of securities more calmly withstands the depreciation of money, as well as stock market fluctuations.

However, investing also has its disadvantages:

• Lack of return guarantees. Asset values constantly fluctuate, so there is a chance of losing money (or part of it).
• Need for specialized knowledge. Investing can be a complex task, so beginners often require the assistance of a specialist.
• Associated costs. To trade stocks or funds, brokerage commissions must be paid.

Savings vs Investments

Thus, we can compare the options for preserving one’s own funds based on several parameters.

• Goal. Those who save money are focused on preserving their funds. They have no ambitious goals. For them, the main thing is to avoid losses or minimize them. Investors have slightly different goals. For them, the primary focus is capital growth and earning income that allows them to increase the initially invested amount.
• Profitability. Accumulation, whether in a bank account or a deposit, is characterized by low profitability. It may not even cover inflation. However, this does not contradict the goals; deposit interest rates allow for the preservation of money or minimal losses from inflation. Returns on investments can reach tens or hundreds of percent, far exceeding the interest rates promised by banks.
• Risks. Banks guarantee the return of money from accounts and deposits, indicating low investment risks. In case of problems with banks, the state, insurance companies, or funds insure deposits and return sums to depositors, albeit not in full. This further reduces the risks of saving. With investing, the return of investments is not guaranteed. Consequently, the risks investors take are significantly higher (exceptions are possible due to asset selection). However, risks and returns are directly related; an increase in one inevitably increases the other.
• Liquidity. Converting bank accounts and deposits into cash is quite simple, and the amount can be withdrawn literally within a few hours. At the same time, depositors may only lose interest on the deposit. Investing is somewhat more complex. While securities or tokens can be sold relatively quickly (subject to certain asset selection conditions), the liquidity of investments in business or real estate is quite low.
• Time horizon. The term of keeping funds in deposit accounts is limited by the duration of the agreement. There are no such limitations for bank accounts. There are no time restrictions for investments, except those set by the investor themselves to achieve financial goals.
• Costs. For bank accounts and deposits, fees are low, and with significant amounts, they may even be absent altogether. Investors must pay trading commissions to brokers or fees to management companies, or expenses for maintaining real estate, etc. Consequently, investor costs are significantly higher.

Additionally, successful investing requires a certain amount of knowledge. For saving, it is quite possible to do without it, relying on basic financial literacy. However, despite all the differences between both approaches, they are designed to protect funds. Both depositors and investors open accounts at banks or with brokers (although nowadays many banks also provide brokerage services). This common feature almost completely nullifies all differences. It can be said that a depositor is essentially an investor, just more cautious.