What is the difference between saving and investing?

The terms saving and investing are used interchangeably by many. It’s not a big mistake, as both start from the fact that you don’t spend your existing income in full, but set aside some of it. I mean, you want to live a little better. Since saving and investing are still a little different, let’s look at the difference between the two.

Savings

Saving means income that is not spent. (Yes, you spend it when you the invest, you buy investment from it, but that will be below.)
Most people usually keep this extra income in a bank account. But you can also save as cash in a “piggy bank”. This is typically done for a later purpose, to guarantee their own financial security.

In everyday usage, people also prefer to refer to their money in the bank as an investment, although this is not the case in economic terms and neither in terms of returns. (The money in the bank is mostly savings.)

The savings rate is a% of the income saved. This has been steadily hovering around 6-7% in Hungary for years in the proportion of available and growing incomes. While the current, extremely low interest rate environment is not very encouraging for savings (“why do I put it in the bank if I don’t get anything for it?”), The pursuit of security in the Central European region is the highest in Hungary.

When do you use the savings?

As a savings, you should cover goals within a year that are already visible but exceed the amount that can be easily covered from your regular monthly income. Examples include:

starting school
car service
vacation
extra spendings for Christmas
in the case of seasonal income, you cover the narrower months from savings
the portion intended to prepay your loans
although a disease cannot be seen or planned, you also build up an emergency reserve from the savings.

For things over a year or more, use an investment where the goal is return rather than 100% security. This is because you will not achieve your long-term goals with a bank deposit.

It affects the level of savings

Interest rates

The higher the interest rate set by the central bank and the risk-free interest rate available on government securities, the higher the willingness to save. As people compare the expected return on investment to the risk-free options available, they will no longer be so attractive in a high interest rate environment. After all, the gap between the yield available on them and the interest-free interest rate is narrowing. The risk, however, remains.

Before you put your money into bank deposits or government securities from your existing investments at a higher interest rate, keep in mind that the higher interest rates available on government securities typically go hand in hand with the level of inflation. This way, your money will not increase significantly in real terms.

Confidence in the future

Low confidence can encourage households and businesses to save more. After all, who knows what the future holds.

Investment

The part of your money where you buy something (stock, real estate, mutual fund, etc.) in the hopes of making a profit. Accordingly, you also assume all risks. This is because 100% security comes with a return of around 0%.

Investment in the economy should be defined as a supplement to the capital stock. (Just to blink: Gross fixed capital formation)
For example, the investment may include investing in factories or may include the new capital. The investment may also include expenditure on human capital, such as investment in training and education.
So everything you bought because it even bring you something.

You can achieve growth in many ways by choosing the right investment for you. Such as:

extra income: e.g. you have invested in education and thus fall into a higher income ranking.
rent: usually for real estate
interest: the usage fee for the money lent
yield: it can include interest, but even exchange gains.

When do you use the investment?

Because you use your investment for a return, the worst thing that can happen is that you have to reach for your long-term solutions because of your short-term goals. In most cases, this is almost guaranteed to be a loss for you. Thus, use an investment if:

if you already have a stable emergency reserve
if your earnings are stable but at least predictable
choose it for build larger amounts of money that are too burdensome on your own

Solutions that take more than a year require long-term thinking, so it doesn’t hurt to plan your investment.

The level of investment is affected by:

Interest rates

Higher interest rates appear not only on the deposit side but also on the loan side, thus making the investment more expensive. As the willingness to invest decreases, the economy spins less and you need to look more closely at which company you are investing in.

Confidence in the future

If companies and individuals are confident, confident in stability, they are willing to invest. When they hear bad news, or just feel the headwinds of a crisis, they postpone their decision.

Summary

The savings are set aside to cover a later edition, e.g., we go on holiday from this, or in a good case, the Christmas gift is also from this, not on credit. The risks of the investment are typically assumed due to the available profit (eg return).
The higher the interest rate, the more people save and the willingness to invest decreases. On the one hand, higher interest rates occur not only on the bank deposit side but also on the credit side. This will make the purchase more expensive, or if you are thinking of buying shares in other companies, they may make it riskier.
On the other hand, if a relatively high interest rate can be achieved even without risk, the possibility of a declining additional return will be attractive to fewer people.
The greater the confidence in the stability of the economy, the more we are willing to invest and, in the event of danger, the more we postpone that decision.

Questions:

If you have an investment that you put on a bad horse and didn’t win anything with it, you sold it with a zero balance. Do you consider this an investment?
What do you think of it if even the break-even doesn’t come out?
Do you think, at a time when the coronavirus has caused a downturn in the stock market, is it worthwhile to invest, or rather just build up a safety margin? Why do you think so?

If you would like to protect yourself against inflation, contact us to arrange an appointment.