Depending on what your financial goals are, you may choose to save - and invest!
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We know that having savings can help us when we get into sticky situations. Ya know, pesky bill surprises, car troubles...you name it, your savings can help you out.
But depending on what your financial goals are, you may choose to keep a bit of your savings in a savings bank account… and the other saved up amount...in an investment.
Saving money generally involves setting aside a portion of your income into a different account, and building a pool of money to use in case of emergencies, or to achieve certain financial goals (i.e. to buy a house).
Right now, savings accounts with your bank or lender tend to have a pretty low interest rate (like 0.1% per annum). That means if you have a balance of $1,000 in your savings account at the end of the year, you’ll earn $10.
This interest compounds, which means you receive interest on the interest you already earned! For a compound interest breakdown, see here.
The great thing about savings accounts is that they are pretty liquid. In other words, you can easily pull out your cash from a savings account, or transfer it to a different account. This means they’re handy for short-term goals, like saving for a holiday, or paying an upcoming bill.
Investing also involves setting aside a portion of your income...but into something that gets better returns than 0.1% (i.e. an exchange-traded fund, or individual shares).
There’s a little bit more to investing than there is to savings accounts. For example, you’ll need to get your head around the ins-and-outs of different investment platforms, potential shares and different investment vehicles (i.e. a managed fund, an ETF, a stock option...the list goes on).
And it ain’t no short-term play, Flux fam. If you want to invest, you should be playing the long game. Investing is great for financial goals like early retirement, children’s school fees, house deposits...things that have a 7+ year time horizon.
This is because - unlike a savings account, where your money can’t go down - markets can rise and fall, which means your investments can actually lose money. So, you need to give investments time.
Over 10 years, the ASX200 has an average total return of 9.3% each year. That’s a lot larger than 0.1%. And, your interest compounds in your investments, too.
So which is right for me?
Well, depending on your financial goal, and your level of financial education, you may go either or. Or, you may choose to do both!
This should help you out:
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