The benefits of saving
Saving is a great habit. To have money aside, whether that's for the short or long-term (or both!) can be highly beneficial to reaching many a financial goal. And the most common way for people to meet their financial goals is saving.
There's many benefits of savings, when comparing it to other riskier method of wealth accumulation such as investing. For example, in case of emergencies, savings are easily accessible and readily available if you need to access funds quickly - this might not be the case for investments.
Additionally, savings are good for short term financial goals as you'll know exactly what the amount will be - whereas due to market fluctuations/volatility, most investments can vary quite a bit in value in the short-term.
Last, if you have a low risk tolerance, meaning you're very reactive to value changes (e.g. from one day to the next your portfolio value drops 20% and you panic sell as a result), you may also want to consider whether less risky approaches to growing your wealth, such as savings, are a better fit for you. Investing comes with risk and whether that works for you is best determined by doing your own research.
While saving is a great habit and it is generally recommended to have savings set aside, it’s also important to consider the value of investing. Here we'll discuss why investing matters.
What is compound interest?
One of the most compelling reasons to invest is the power of compound interest. When you invest, your money has the potential to earn returns, and those returns can generate their own returns over time. This compounding effect can significantly increase your wealth. For example, if you invest $10,000 at an annual return of 7%, it can grow to over $76,000 in 30 years, thanks to compounding. However, it’s important to remember that if the market value of your investment decreases, you will not benefit from compounding.
Counteract inflation
While saving money in a bank account is safe, it may not keep pace with inflation. Although there are several high interest savings accounts out there - such as GoalSavers and Term Deposits - that may keep up with inflation a bit better, they do come with requirements around keeping money in the respective savings account. The issue with inflation is that it reduces the purchasing power of your money over time. For instance, if inflation averages 3% per year, the value of your money will decrease - unless you can get a gain of over 3% - which means you’ll be able to buy less with the same amount of money in the future. Investing in shares, managed funds, ETFs, or other assets, can help your money grow at a rate that outpaces inflation, preserving and increasing your purchasing power.
Achieve financial goals
Investing can help you achieve significant financial goals such as buying a home, funding education, or reducing your work hours. These goals often require amounts of money that you can’t realistically accumulate through saving alone. By investing, you can take advantage of potentially higher returns from shares and other assets over the long term, helping you reach your financial goals more quickly.
Financial independence
Growing your wealth through investing can help you create financial security and independence to do the things you love. From working fewer hours or spending more time with loved ones – financial independence allows you to make decisions based on your preferences and without being overly reliant on others.
Building longer-term wealth
While saving is a vital financial habit, investing is a tool for building long-term wealth and achieving financial security. By investing, you can take proactive steps to grow your money and achieve financial independence.
To learn more about investing, go to Investing hub in the CommBank app.
This content is brought to you by Friends That Invest.