On a practical level, saving involves putting aside money today for use in the future. It’s what economists describe as ‘forgone consumption’. In other words, rather than spending all your money, you tip some into a savings account for another time.
Savings is a sensible starting point in investing because it provides the funds you need to purchase a range of different assets. However investing goes one step further, helping you achieve personal goals with three significant benefits.
While saving means setting aside part of today’s money for tomorrow, investing means putting your money to work earning a decent return.
‘Growth’ investments like shares and property, for instance, should rise in value over time (hence the term ‘growth’). So as an investor, you can expect to earn capital gains as well as an ongoing return (like dividends from shares or rent from a property).
Inflation is the ongoing rise in the cost of living over time, and it can wreak havoc on our financial wellbeing.
Let’s say for example that inflation is 1.5per cent. This means the cost of the goods and services we buy increase by 1.5per cent from one year to another. For instance, a loaf of bread that costs $1.00 today would cost $1.15 next year.
When you hold all your spare cash in a savings account, the purchasing power of your money falls over time due to inflation.
The only way to outpace inflation is by investing in assets that deliver long term capital growth.
This capital growth ensures your wealth is growing faster than inflation. This is why you may come across investment returns described as ‘real’ returns – it means the return on an asset after inflation.
Imagine earning extra income without any effort on your behalf. That’s exactly what quality investments can provide.
The returns your investments earn can be used as a source of regular extra income for day to day living. Or you can reinvest the money to further grow your wealth.
The bottom line is that savings are important. But the benefits of investing can go far beyond having some ‘rainy day’ cash.
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