Know the Big Difference Between Saving and Investing

Conventional wisdom tells you that saving a decent amount of money and investing moderately according to your needs is the approach to take to meet your monetary objectives.

Saving money essentially refers to putting away an amount of money (whether fixed or regular) in a low-risk avenue like a bank or deposit account. If placed in a financial institution, your savings are usually available whenever you need to take it out.

Saving is usually the first step in your journey of financial growth. Savings are liquid and can be used for things like your emergency fund – something you will fall back on during medical emergencies and unemployment. It is therefore important that you should always maintain some form of on-going savings, just so you’re ready for rainy days.

Depending on your financial goals however, saving alone may not be enough. There’s also inflation to consider. Annual interest rates on savings accounts in the Philippines stand at about 0.25 per cent per annum, and range from about 1.125 to 1.375 per cent per annum on time deposits. The country’s inflation rate, however, stands at about 4 per cent currently.

This means that the amount of interest you get on your savings account is not enough to counter inflation rates. Here’s where you need to turn to investing to help make up the difference and help you increase your financial net worth.

Investments are usually the section of your portfolio that involve putting money to work for you with the view of getting a higher rate of return than you would on a savings account. Depending on your risk appetite, you could select from multiple classes of investments that can help earn the returns you desire. Common investments include stocks, bonds, property and investment funds.

So what are the main differences between saving and investing?

Without going too much into technical detail, the main differences between saving and investing lie in their associated risks and potential returns.

Saving money is more passive as the saving process doesn’t usually change. Money gets put in (usually in a savings account) and taken out as needed. Your money is considered safe and liquid, but – as we’ve established earlier – generating a relatively lower annual interest rate.

Investing by comparison, is a more active process. Depending on what you’re investing in, moderate to frequent monitoring of your investment portfolio could be required such as when you invest directly in stocks. If you do not have the time and expertise to do that, there are investment funds available for you. These investment funds are managed by professional fund managers who keep constant watch of the market for the benefit of the investors. The risk or potential loss in any investment is usually relative to how much your potential return can be obtained in an individual asset class. So investing in a higher risk product could earn you a potentially higher return.

In order to minimize risk, it is also recommended that you diversify your investment portfolio and stay invested for the recommended period of time.

Obtain advice before investing

If you’re a beginner investor, it is important that you are absolutely clear about where you’re putting your money in. Search for investments that will match your financial goals, investment time horizon and risk appetite. Obtain advice from your local bank to help you gain clarity on what would be best for you, including relevant fees and charges that are a part of your investments.

BDO Trust and Investments Group offers a comprehensive range ofinvestment solutions that anyone – from beginner to expert – can choose from to help reach one’s financial goals. You may visit your nearest BDO branch or email investments@bdo.com.ph to have your investment needs taken care of.

Why wait? Start making your money work for you today.

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Unit Investment Trust Funds (UITFs) are not deposits but trust agreements. They are not obligations of, nor guaranteed, by the financial institutions who established them (the “trustee”) and are not insured by the PDIC. UITFs do not carry any guaranteed rates of return. Any income or loss arising from market fluctuations and price volatility of the securities held by the UITFs, including government securities, is for the account of the investor. The units of participation in the funds, when redeemed, may be worth more or worth less than the initial investment of the investor. Historical performance, when presented, is purely for reference purposes and not a guarantee of similar future results.  The trustee is not liable for losses unless there is fraud, willful default, bad faith or gross negligence on its part.

via Yahoo

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