When introducing children to money, we often think of the historical “Dollarmite” and bank programs many of us had through our school days, or perhaps it was giving pocket money to the piggy bank. As we progress to adulthood, we still rely on our everyday accounts to help us save money towards our financial goals.
With the official cash rate still at low levels, the interest rate in savings accounts not meeting inflation, and term deposits locking money away for a return below inflation, do we need to consider investing as the new saving?
We will define this as investing in an everyday bank account.
We will say this is the purchase of shares and managed funds.
Why do we save our money rather than invest? The answer is lower volatility (the amount we have does not go up and down), we do not have to change our savings to cash to purchase goods and you need to save first to invest. However, savings often fall behind the inflation rate and will typically deliver a lower return than investing over the long term.
As with many aspects of financial advice, the right answer will depend on your financial requirements. Understanding your goals and your willingness to take on risks will help determine the correct strategy. Another factor is the length of time for your saving/investment.
If your goal is to hold emergency funds, then cash is the answer. It is there and ready when you need it. Often, a smaller dollar value goal required in the short term will result in saving as the answer (eg. paying rates, household expenses, domestic weekend holidays). The bigger the goal or the longer duration to achieve it will suggest investing as the preferred medium (eg. home deposit, new car). For many years, a savings account was the key avenue for these longer-term goals. However, many are now switching to include some investing to ‘speed’ up the goal timeframe.
Saving and investing incur differing levels of risk. Money in a bank account is low risk, whereas investing holds greater risk (with each investment having a different risk level from the next). Of course, the more risk, the more potential for return as per the classic risk vs return graph. So, if you are just starting and have a solid income, you might have higher acceptability of risk, as opposed to someone in retirement mode who wants to preserve their hard-earned wealth.
Saving and investing can both be sound financial strategies to help achieve your goals. The choice you make should depend on you and your own circumstances.
If you are looking at saving for a short-term goal or investing for your future, our experienced team of financial advisers can help determine the right avenue for you.
Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.