Saving Vs. Investing: What Should You Do?

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    Ebunlomo 3 years ago

    The funniest yet most apt definition of saving I have ever encountered is: Saving is simply procrastinated spending. Others say saving is making a present sacrifice to buy future freedom. The more you save today, the more freedom you can have in the future. Majority of us have some form of understanding to what saving is and why it is important. From saving in jars, 'kolo' boxes, piggy banks or our wallets to saving in bank accounts, we have either seen saving occur or done it ourselves. But is saving good?

     

    Here's a short story: my friend Jennifer wanted to buy a house worth $300,000, if she could set aside $500 monthly from her monthly income towards raising this amount. How long would it take Jennifer to raise the money needed to buy the house assuming she wants to pay for the house in full and inflation remains at a flat rate of 0%:

     

    If she saves $500 monthly, it will take her 50 years to do it.

     

    BUT if she INVESTED $500 monthly at a 15% average annual profit & reinvest all her profits, it'd take her 14.5 years to do it. That's a little over a quarter of the time it would take if she just saved. Why is this the case?

     

    Saving collects the resources you have and stores it. Investing collects your resources and put them to work for you.

     

    It is commonly said that wealth is not determined by how much you make but how much you keep. Let's extend that thought a bit. Saving alone is not enough; you must go a step further to invest. Instead of saving towards your goals, invest towards your goals. So, wealth is not just how much you make or how much you keep; it is how much the money you keep makes you. As explained in this post, the attitude of the wealthy towards money is to invest rather than save.

     

    Another edge investment has over saving is that it protects your money from losing value over time due to inflation. Inflation is simply a reduction in the purchasing power of money. When you need more money to buy the same quantity or quality of goods it could buy in the past; inflation can be said to have occurred.

     

    Remember our story with Jennifer, now include inflation into the equation, imagine if Jennifer started saving for the house in 1969 by 2019, the $300,000 she would have would be worth less than a $100,000. But if she invested it over that same time, let's even say the return reduced to an average of 5% per year, she would have over $1,000,000.

     

    If you have done any research on saving and investing, you would probably say to yourself that this is not anything new, but why do more people save than they invest?

     

    For several reasons: some are risk-averse, some do not know how to begin, some have gotten into the habit of procrastinating (remember, saving is spending procrastinated) that they continue procrastinating when to start and they never end up starting, some try to time the market making statements like "the market is too high now, I will wait for it to crash" and they keep waiting and never end up investing.

     

    The world is in a tough spot, the future is uncertain; what if I do not have enough funds to invest currently?

     

    Sometimes, the first and best INVESTMENT you can make is in yourself. Spending money to pay for an online course/advanced degree could expose you to information that could multiply your income or reduce your expenses. Paying for advanced software or equipment could improve your design quality, thus increasing how much you can charge for your services. Investing in your business can go on to make you a ton of money.

     

    Bet on YOU. No one can bet on you as you can.

     

    N.B.: I say 'sometimes the best investment is in yourself' because not every investment in oneself would be most profitable, like going to school to study the wrong course. Sure, you might acquire some skills that could be applicable in your ideal career path, but that time could have been spent doing things that would be more profitable.

     

    Like saving, keeping your skills or knowledge without investing in sharpening or improving them would quickly cause the purchasing power of your skills to fall.

     

    But here's a clause that I don't see everywhere:

     

    Like every investment, you must:

     

    Understand the business you're investing in: Understand yourself, understand which option is best for you. Do you learn better with online courses/face to face classes? Do you NEED new equipment or do you need to improve your skills first to get better designs with the equipment you already have? Understand what you need.

     

    Understand the risks of the business: Starting a business might mean you would have to quit your job or your productivity at work might reduce, can you manage that? The business you might want to start might not become as big as you expect, are you prepared for the risk of failure? The government can wake up tomorrow and tax or put you out of business, what do you do then?

     

    Are you comfortable with the business and the risks? Given these risks, are you ready to face them squarely if they arise?

     

    If you're happy with 1-3, do you think the return on your investment is worth the risk? Would the profits you make in the short AND long run be worth the stress you'd have to go through to make that investment? Would getting a PhD to serve you in both the long and short term?

     

    If yes, then invest.

     

    If no, then you might be better off investing passively in other investment vehicles.

     

    Final Thoughts

     

    In the very short term, saving might be a safer option, but enough evidence has shown that in the long term if the right investment strategy is adopted, it is better to invest than save. Investment strategies for everyone is not the same, younger people might want to take more risk, and the older people become and the closer they are to retirement, the more they move their holdings to more stable investment options like bonds and bond funds. Still, irrespective of the strategy, I hope one thing we can agree on is the importance of investing and why when faced with the long-term decision of to save or to invest, you would choose the latter.

     

    Source: Oghenerukevwe Odjugo

     

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