Why Investing is better than Saving in the long term

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Once you start making money, you have three options as to what to do with your earnings. These include - spend it, save it or invest it. Most people go with the first two options, i.e. they either spend all their income or save some of it for future purposes. However, when it comes to saving our hard-earned money for future use, we all can benefit from understanding the concept of investing, and why it could be better than saving in the long term.

What is investing?

When we talk about saving money, we essentially mean to keep a part of our earnings in a safe place like a locker or a bank account. We are not interested in making an income from this money. We only want to save it so that it can be used at a later date for a specific or any purpose.

Investing is different from saving. By investing, we want to put our money into something that can help appreciate its value over time. In other words, by investing our money we want to earn more or get returns from it.

Just like we use a bank account or a locker to save money, we use appreciating assets like equity, debt, gold, real estate, crypto and others when looking to invest money and earn returns from it.

Why or how investing is better than saving

To better understand the importance of investing, one must be familiar with the concept of inflation.

In the simplest words, inflation refers to the increase in prices over time. As you know, the prices of almost all products increase with time. These include food, electricity, gold, oil and almost every other commodity. This deflates or decreases the value of money. Normally, there is a standard annual rate of inflation, which may differ from one country to another.

Say you currently spend $100 on groceries every month. Would you be able to buy the same amount of groceries with $100, say, five years later? Most probably not. This happens because the value of the currency will decline with time.

Now, there is a very important lesson here.

Because the value of money declines over time, the value of your saved money will also decline. If you (only) save $100 for 5 years and the average annual inflation rate during this period is 3%, and there is no interest involved, the value of your savings after five years would be $86 in the present term. That means $100 five years from now will have the same purchasing power as $86 today.

So, what can you do to ensure your money doesn’t lose its value over time?

The best answer is - INVESTING.

When you invest your money rather than just save it, you ensure the value of your money increases, and does not decrease, with time. But, make sure to choose carefully where you invest your money, as there is some risk involved with every type of investment. The best idea is to diversify across different assets based on your risk appetite.

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Posted with STEMGeeks