There are several differences between saving and investing, with the biggest being the level of risk involved. Saving involves setting aside a portion of disposable income for later use. It's a certain amount of money that we don't spend from the income we receive at regular intervals (usually once a month). In essence, we're creating savings.
There are various ways to save. Those who prefer cash keep banknotes or coins in a place known only to them, or within a small circle of family or friends. For those who don't want to risk losing their saved money, depositing it into a bank account, whether it's a checking, savings, or term deposit account, is a common choice.
Saving through bank accounts is arguably the safest way not to lose your money. Every bank account is insured by law up to a certain amount, typically up to 100,000 euros. Therefore, if a financial institution goes bankrupt, you're guaranteed to receive your money up to the insured limit from the deposit insurance scheme. However, if you have multiple accounts at the same bank, the limit applies to the total amount across all accounts. So, if you have a substantial amount saved, it's advisable to spread it across accounts in multiple banks.
However, there's a cost associated with saving in bank accounts. Even though bank accounts usually earn interest, the interest rate typically doesn't exceed the inflation rate. This means that your money is losing value in the bank account without anyone actually deducting from it. In essence, inflation eats into your savings in the bank.
Investing against inflation
So, if you want to combat inflation, you have no choice but to muster up the courage and transition from saving to investing. The primary difference between saving and investing is that investing requires your active involvement. You can't just leave your money lying passively somewhere and wait to see what interest the bank credits to your account. With investing, you actively seek opportunities to grow your savings.
There are countless ways to invest and various types of assets to invest in. This depends on what level of returns you aim to achieve, how much risk you're willing to take, what is your investment horizon, your level of knowledge and, last but not least, how much time you're willing to dedicate to your investments.
We invest because we expect higher returns on invested funds compared to saving. However, as expected returns increase, so does the level of risk we undertake. Returns and risks are two sides of the same coin, or the good and bad of every investment. Unfortunately, you can't just choose the good part.
Therefore, it's crucial to carefully consider what you're investing your money in to achieve an acceptable balance between returns and risks. Experts talk about the composition of an investment portfolio. A portfolio is a collection of various types of investments in which you've decided to put your money. It should be constructed in such a way that when one part loses value, another part gains value and the portfolio as a whole grows.
That's why it's advised to have a mix of stocks, bonds, commodities, as well as real estate, precious metals, or even foreign currencies in your portfolio. An investment advisor should be able to advise you on the optimal portfolio composition.
Patience is crucial when investing. You should be aware of how long you're holding the investment, and you shouldn't be swayed if, for example, your portfolio loses value. A good aspect of assets is that they appreciate in the long term. However, that doesn't mean that they can't decline in the short term. If the value of some assets in your portfolio is decreasing, it may be a good opportunity to buy more.
For example, stock markets have fallen by approximately a quarter since the beginning of this year. Instead of succumbing to skepticism, it's good to consider whether it's appropriate to view the short-term decline as an opportunity and buy some stocks with the expectation that their prices will eventually rise again.
