Saving is the act of not spending part of your income. Saving is when you put money away in a bank account for future use. It requires you to live below your means. Being disciplined about saving is an essential requirement of sound financial planning. If you’re already a good saver, congratulations!
When you put your money in a savings account, the interest rate is generally low. To calculate the real rate of return, you need to subtract the cost of inflation and the tax on the interest earned. You may find that the effective rate of return may be zero or even negative after you adjust for inflation and taxes.
Money accumulates through saving but doesn’t grow.
Investing is when you redirect your savings into investment vehicles, anticipating a better rate of return than available from a savings account. Investing can earn a higher rate of return over time, depending on:
By reinvesting the money made on your investments, you can experience real growth through compounded returns.
Note that your investments may be subject to tax if held outside of a registered account such as an RRSP. The cost of tax can reduce your compounded returns. The impact of tax is not considered in this calculation.
As an investor, you can play one of two roles:
When you lend your money to a person or an institution, there may be some risk involved. A savings account is usually low risk because you expect to get your money back plus interest. When you buy a security (such as, shares in a company), you’re hoping that the security will increase in value and possibly pay out dividends. However, company shares that may provide the potential of higher returns come with less certainty. Your shares may lose instead of increasing in value.
This yin and yang of risk and return is your dilemma when investing. You can’t get both safety and growth in the same investment vehicle. Either way, you are practicing the art of investing.
Whereas saving is a discipline, investing is an art. It is a process of matching both your purpose (goal) and risk tolerance with an appropriate investment vehicle. It doesn’t have set rules; professionals hold different opinions on how to invest and in what to invest.
Investment strategies don’t work equally well for all people at all times. Investment products and strategies evolve over time; what worked in the past may not work today.
There are many acceptable ways to invest, you need to identify one that works for you. Further, your investor personality may well change over time, as your wealth, knowledge, and goals change.