When it comes to planning for life in your post-retirement years, it can be far better to invest in a diverse portfolio than it is to simply save your earnings. Saving is usually a strategy better suited to goals of a short-term nature. Comfortable post-retirement living, however, is a long-term goal served well by investing.
We all have goals that we would like to attain by a specific time in our lives, but what can we attain with a savings account that gives us little or nothing annually?
Though risky, investing has a higher potential for growth. When compared to a savings account, investing generates more income on your capital annually. Understanding the various types of investments and how they work is essential if you want to be successful when reaping your financial rewards. We all want our hard-earned money to work for us, and this simply means that we want to see our capital generate more money. Investing does just that.
Let’s explore the difference between a savings account and an investment account.
When we save, we ‘park’ our funds in a savings account or a chequing account at a building society or commercial bank, expecting a miracle to happen by the end of the financial year, but we are often disappointed. We are disappointed because we believe that we should be seeing at least a minimum of growth of one per cent annually, which is not always the case. As such, this deters a person from saving, as they will not be seeing any real returns after a year or two when they opt to save. Even though people try to save, they find it hard to do so as funds are readily available by means of a bank card or wire transfer. This makes it easy to splurge. Knowing that the money is available, we often tell ourselves that the next pay cycle we will double what we took out of our accounts to buy those fancy new shoes or new car parts that we just cannot afford.
On the other hand, investing is when we use our money to buy assets that have a good probability rate of generating sufficient returns over time. These assets can be in the form of stocks, bonds and even real estate. Even though you can take your funds at any time from your investment portfolio, it is a more tedious process when compared to withdrawing funds from your savings account. Removing funds from your investment account applies the T+3 method (trade + 3 business days to obtain funds). For you to withdraw funds from your investment account, you will have to sell your financial securities and after this trading has been completed, it will take three business days for the funds to settle. Thereafter, you may choose to get a cheque or do a wire transfer to an account of your choice.
Your funds are not as readily available when you invest as opposed to saving. It’s not as easy as heading over to an ATM machine to withdraw funds. As Jamaicans, it is in our nature to save rather than invest, but we need to move away from this culture if we want to attain our financial goals in a timely manner. Time is the greatest master, and we should not waste whatever time it is that we have to secure ourselves financially. When you are investing, it is important to know about the markets and what they have to offer you as a potential shareholder in a company.
Having a good broker by your side is also an asset, as he/she will help you to attain your financial goals by understanding market volatility. When you save there is not much to know about putting your money in a commercial bank or building society, but when you invest it is a learning process as it is imperative that you understand how the local and international markets operate. Also, never be afraid to ask questions when you are investing, as your advisor is there to help you along the way.
People will always debate the riskiness of investing and state that saving your money is safer, but let me shed some light on this notion. This is not entirely true. As an investor, you have a choice with respect to the type of financial securities you can purchase. They range from conservative to aggressive investments. If you are not a risk taker, your funds can be invested conservatively. Every so often, the conservative investors will move out of their comfort zone, once they build that trust with their dealer representative and have a grasp of the local and international markets.
With that being said, we should all think about investing as our first option when we are ready to take that bold step towards our financial freedom. Commercial banks and building societies claim to have competitive interest rates on their savings accounts, but they cannot be compared to that of an investment account.