Save or invest: What should young people focus on early in their careers?

Savings and investing might seem almost the same, since both involve accumulating money. Yet they are actually quite different, and young people can benefit from starting to invest early.

THE DIFFERENCE BETWEEN SAVING AND INVESTING

Savers simply put aside a certain amount each month and earn interest. They are often saving for a specific goal, such as having enough money for an overseas vacation or having cash in case of an emergency or paying for a child’s education. Savers have access to their money any time they need it.

Savings can be put into a savings account or, to earn a higher interest rate, into a time deposit or money market fund. Many savers put their money into a bank account, since the accounts are guaranteed by the government through the Singapore Deposit Insurance Corporation for amounts up to S$50,000 and are quite safe.

Investors, on the other hand, take their money and allocate it strategically so that it will grow faster over the long term. They put their money into a variety of investments that have usually grown faster than savings, such as shares or bonds or property.

THE ADVANTAGES OF INVESTING

The advantage of investing is that investors can end up with significantly more money over the longer term.

Take a person who is 25 years old, for example, who puts aside S$100 per month for the next 30 years.

If they put S$100 per month into time deposits for the next 30 years and earned a slightly higher-than-average rate of 1 per cent, they would end up with S$41,997 when they turn 55. The interest rate over the past 10 years for 12-month time deposits has actually ranged from a high of 0.89 per cent in 2006 to a low of 0.31 per cent in 2014, according to the Monetary Authority of Singapore, so they could end up with less.

Over the same period of time, according to American financial services firm State Street, the average return on its STI ETF has been 3.98 per cent. If that same 25-year-old invested S$100 into an ETF every month and earned that 3.98 per cent, they would end up with S$69,387.

Comparing returns isn’t quite so simple, of course, as interest rates and share prices will fluctuate over time. Still, the comparison shows how an investor could earn far more than a saver over a long period.

The benefits of investing go beyond just a higher return. As UK non-profit Money Advice Service put it: “For longer-term goals, it’s often best to invest because inflation can seriously affect the value of cash savings. The stock market tends to do better than cash over time.” Moneywise magazine opined more dramatically that with the “new normal” being near-zero interest rates, “saving your money in an average bank account is akin to withdrawing half of it every decade and dumping it in the bin.”

It is also important to note, as the US Securities and Exchange Commission said, that there is a trade-off. While consumers can earn more money when they invest than when they save, “you have a greater chance of losing your money. There is a trade-off between the higher risk of investing and the potential for greater rewards.”

Hands On Banking, an interactive digital programme by Wells Fargo Bank, summarised the difference quite aptly. “Saving is typically for smaller, shorter-term goals in the near future (usually three years or less) like going on vacation or having money for an emergency. Investing can help you reach bigger long-term goals (at least four to five years away), like saving for a child’s college education.”

START SAVING AND INVESTING EARLY

Whether you’re a new graduate in your twenties or a young family in your thirties, saving a little and then investing regularly are both important.

As financial planning firm AAM Advisory described it, “a regular savings programme is a good way to start with personal investing. While saving is a good habit,” however, AAM advised that “simply leaving it with a bank may not earn you a healthy rate of return to afford the kind of lifestyle you desire. While investing involves greater risk, it also offers greater growth for your money.”

The best path for most consumers is to give up a little, and start saving as soon as possible.

Once you’ve saved an amount equal to 3-6 months of your salary, which gives you enough to cover a healthcare emergency or a job loss, it’s time to start investing so that you can gain the full advantage of earning higher returns. Investing S$100 a month at 3.98 per cent starting when you’re 35 rather than 25, for example, will only give you S$36,716 rather than S$69,387. Even though other types of investments such as shares or property may have higher risks, they can also earn an even higher return.

While starting to save and then to invest may seem difficult amidst the pressures and expenses of everyday life, only by starting to invest early rather than just saving will you be able to have the comfortable lifestyle you deserve later on.