Difference Between Savings And Investments

Financial literacy is one very important factor we can’t overlook when it comes to women’s empowerment as it helps women make more informed financial decisions, plan more effectively for the future, and achieve financial Independence.

Understanding savings and investments are integral parts of financial literacy for women, and in this blog post, we will be talking about savings and investments in depth, including their purpose, types and differences, plus how to create a balance between the both of them. 

Without further ado, let’s dive in:

Savings

Just like the name implies, savings is all about putting money aside, so that it’s readily available whenever you need it and has a low risk of losing its value. Think of it as a kid putting money in a piggy bank, but instead of using a piggy bank, you use a savings account or a fixed rate bond that earns interest over time. There are various reasons why you need to save, this includes:

• For financial security: One of the most important reasons why you should save is for the financial security it gives you. Savings allow you to create a safety net for your future expenses and other financial needs. 

• Having an emergency fund for unexpected expenses: Life, as we know, is highly unpredictable, having savings helps you to navigate whatever life throws at you easily, rather than running from pillar to post trying to raise funds. 

• To relieve financial stress: Having a substantial amount of savings enables you to live a more fulfilled and enriching life as you are more likely to be less stressed about unexpected expenses and your future goals. 

• To buy something or go for a vacation: Savings allow you to go on your dream vacation, or buy a gadget you want, and normally won’t be able to afford on your salary. 

• To compound interest: Savings allows you to earn interest, especially when you save with banks or financial institutions with high interest rates. This interest is added to your initial deposit periodically, helping you increase your savings over time. 

Types of Saving Accounts 

There are various types of savings accounts you can use to begin your savings journey. They include 

1. Traditional savings account: This has very low interest rates, about 0.01% of your deposit amount.

1. High-yield savings account: This has interest rates higher than that of traditional savings accounts, around 5% of the deposit amount.

1. Fixed rate bonds: This savings account is offered by banks with a fixed interest rate and maturity date. 

1. Money Market Account (MMAs): This type of savings account pays variable interest rates that can change at random. 

1. Speciality savings account: This savings account is used to achieve specific goals like a college fund, retirement funds, down payment for a house, etc. 

Investments 

Investments are usually purchasing assets that may increase in value. These assets could be stocks, real estate, mutual funds, or bonds. Although, unlike savings, investments involve some risks, it also has the potential to generate a higher return over some time. It allows you to diversify and have different assets in your portfolio, giving you the financial freedom you crave. 

Characteristics of Investments 

Investing comes with an amount of risk than savings, however here are some characteristics to help you know what to invest in: 

1. A good investment has the potential to yield positive returns over time 

1. It has possessed an acceptable level of risk when compared to the potential return

1. You should be able to convert it to cash easily and without much loss

1. It should be cost-effective with minimal expenses like management fees, operational costs, transaction fees, etc

1. It should be adaptable to fluctuating market conditions.

Benefits of investments 

• It can help you achieve your long-term financial goals (Financial Freedom)

• Diversification of the portfolio can reduce significant investment risks

• It has the potential for higher returns than savings 

Difference between Savings and Investments 

There are lots of differences between savings and investments, and these differences are determined by factors like risks, returns, account type, etc. The table below shows this difference 

S/N	Factors/Characteristics	Savings	Investments
	Type of account	Bank Account	Brokerage
	Time horizon	Short-term (mostly for emergencies)	Long-term (over 5 years)
	Liquidity	Highly liquid, funds are easily accessible	Varying degrees of liquidity depending on the asset
	Returns	Relatively high	Potentially high or low, depending on the investment
	Risks	Almost none	High risks, with potential for loss
	Taxation	Interests from savings may be taxable	Dividends and Capital gain are taxed differently

Choosing Between Savings and Investments 

While most people think they ought to choose between having savings and investing, you must have both, especially as a woman trying to achieve financial independence. Naturally, it’s portrayed that women are more savers than investors, but this is not right. According to a survey by money power in 2022, more than 73% of women don’t save up to 20% of their income, which is the ideal percentage to save. What does it tell you? Women are still behind even in savings which should be their domain. 

You might be asking yourself, why should I have an investment alongside my savings seeing as I’m among the 73% of women who don’t save up to 20% of their income, or even barely have any savings at all? Well, here is why you must have both as part of your plan to achieve financial freedom. 

Importance of having both savings and investments 

As we stated earlier, having both savings and investments is very important for building wealth and achieving long-term financial security, and here are some reasons why:

1. Investments provide you the opportunity for financial growth, while savings offer liquidity and stability 

1. Having both savings and investments allows you to diversify your financial portfolio and mitigate risks 

1. Savings provide you with a buffer against unexpected expenses like job loss, and medical emergencies (especially as parents)

1. Having emergency savings can help you avoid going into debt and tapping into your retirement funds during difficult times, especially in a fluctuating economy 

1. Investments offer the potential for higher returns over the long term, which will help you achieve long-term financial goals and build wealth. 

1. Savings accounts are ideal for helping you achieve your short-term financial goals

1. Keeping your savings separate from your investments ensures that you have money readily available when you need it. 

Allocating Funds for Savings and Investments 

Most people get confused when it comes to how to efficiently allocate their funds for both savings and investments. Here is a brief guide on how to do so:

1. Identify your goals: Identifying your long-term and short-term goals makes it easier for you to allocate your funds. Short-term goals like emergency funds, and down payment for a house or car, should be funded through your savings, while long-term goals like retirement or college funds are better suited for investments. 

1. Check your risk tolerance level: Before investing or saving, assess how comfortable you are with market fluctuation. If you have a low-risk tolerance level, allocate more money to your savings and low-risk investments like money market funds or bonds. If you have a higher risk tolerance, you can allocate more funds to higher growth investments like equity mutual funds and stock markets. 

1. Time Horizon: Consider how much time you can wait to achieve each goal. If you need the money within the next few years, prioritise saving and low-risk investment opportunities with high liquidity. For longer time horizons that are decades or years away (like setting up a college fund for your child, or a retirement fund,,) you can allocate more funds to high-risk higher growth investments. 

Overall, when it comes to achieving your short-term goals (within 5 years) first, prioritise savings and low-risk investments. For long-term goals beyond 5 years, allocate more funds to diversified investments that align with your risk tolerance. Try to regularly review and rebalance your portfolio as your goals evolve. 

Conclusion 

Finally, having understood savings and investments, their differences and how both can impact our financial freedom as women, we must take control of our finances and make informed decisions to help us comfortably manage our money, plan for the future we want and achieve financial independence. 

Remember, your journey towards financial freedom is a continuous process, but it starts with your commitment to learning and taking action. Therefore women should embrace the power of financial literacy, seek guidance from professionals when needed, and take control of their financial density, as financial freedom is not just about the numbers on your bank account, it’s your gateway to independence, personal freedom and your ability to live life on your terms.