Investing and saving are terms that people tend to use interchangeably.
They are both important and can help you achieve your financial goals, but they are quite different, and knowing when to save and when to invest is crucial.
Saving is an essential cornerstone for a good financial foundation. It refers to money that, instead of spending immediately, you put aside for a particular use in the future.
However, although putting funds in savings accounts and term deposits offers easy access and the security of capital, the returns are usually lower than those of most investment instruments.
One of the main motives for investing is to grow your money, either from capital appreciation or income generation, or a combination of both.
These can usually be achieved by investing in assets that have the potential to increase in value, like stocks, mutual funds or even alternative investments such as real estate.
The level of risk you take in investing, or your risk appetite, will determine whether you are a conservative, moderate or aggressive investor.
Another important factor to consider when choosing your investments is their potential to outperform inflation. Inflation increases the prices of goods and services and decreases the purchasing power of money.
To use an example, in July 2021, TT’s headline inflation rate was 2.2 per cent and food inflation rate was 4.9 per cent, while equity mutual fund returns were between six and seven per cent.
The differential is what gives investors a hedge against inflation with additional returns.
Therefore, it is best if your investments earn a rate of return that is greater than the rate of inflation.
Additionally, for your investments to be a success, you need to understand your goals so they can be tailored accordingly.
A general rule of thumb is that you should save for short-term goals, which range from a month to a year, whereas you should invest for long-term goals, which are usually achieved in five or more years.
A common mistake that many people make is to have a haphazard, arbitrary approach to investing where decisions are based on trying to read the market.
It is best to have a structured investment commitment in place, such as a standing order, to prevent you from reacting adversely to changes in market conditions.
Fund management experts emphasise that when you invest at regular intervals, as in dollar-cost averaging, you can remove the guesswork of having to predict when the value of your investments will rise or fall.
With dollar-cost averaging, you continue to invest regular, fixed dollar amounts over a long period in an investment, such as a mutual fund.
The investments are made despite short-term volatility in the fund. As long as you have a good long-term perspective, this is a smart, time-tested way to keep investing, even in the face of today’s financial challenges.
Standing orders and salary deductions are good options to facilitate disciplined, regular and consistent deposits to your mutual fund accounts.
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