If you’ve only recently started taking charge of your finances, you might think saving and investing are the same. Both are ways to put your money to work, but they do different things. We’re going to pretend that Savings and Investing are twins. The one is an entirely forgettable accountant who eats the same thing for breakfast every day. The other one lives a life of adventure and met Madonna.
Savings protect your money while investing grows your money. If you really want to be a money ninja, you need to protect some of your money and grow the rest.
The money to save and invest comes from the same place. You have to make a choice to spend less than you earn, even if it’s only a little. That bit of money you have left over is going to work for you while you sleep.
The boring twin
Meet Savings – the really boring twin that does the same job every day for 30 years. Savings will never buy a boat, but they will also never have to ask their parents for money.
You give Savings the money you want to keep safe. They ensure the money you have today is also the money you have tomorrow. When you need to buy something big, like a house or a car, you ask them to give you the money they kept to help you get going. When you have an emergency, you call them.
The problem is the things we buy become more expensive every year. We call this inflation and we hate it. A litre of petrol costs 9% more today than it did a year ago. If you gave Savings R500 last year so you can buy a tank of petrol this year, your R500 will only buy you what R455 could have bought you a year ago. This is not Savings’ fault. They just held on to your money for a while. That’s why Savings should only get a small part of your leftover money.
Money you save is money in the bank. While you do get accounts that reward you for saving your money by paying you interest, generally the interest you earn on savings is lower than inflation. If you put the R500 you saved for petrol last year into an account that pays 5% interest, you would still have to pay 4% extra for that tank of petrol.
However, you do need savings before you can level up to investing. Savings are easy to access and what you see is what you get. When you wake up tomorrow morning, you’ll be able to guess how much money you have saved based on how much money you had today. You can trust the boring twin to show up for work, no matter what the weather. This is important, because when you need money in a hurry, you want to know how much you have to work with.
The sexy twin
Investing is the other twin. They’re a scuba diving instructor in the Maldives. They have tattoos. They’re more fun to be around, but you would never call them in an emergency, because they’re probably drunk.
Imagine Investing asked you to lend them money to start a business. They promise you a cut of the money they make every year. They also promise to give you a cut of the money they make if they decide to sell the business.
When you give Investing the money, you know they can only pay you back if the business is a success. That’s why you don’t give them all your money. You leave some with Savings, just in case.
You know sometimes Investing’s business won’t make any money for a short period. However, you hope that they eventually do and keep the business going for a long time so you can get some of the money they make every year. This is great, because the money you put in keeps getting you more money without you having to work for it. You understand you’re taking a chance. You’re hoping Investing will sell the business and you can get back the money you put in as well as the profit. You also realise the business might fail and you won’t get anything.
The money you give to the boring twin makes you feel safe, but if you only give your money to the boring twin, you’ll only ever have the money the boring twin keeps for you. Over time, the money the boring twin has will buy less and less. When you give your money to the sexy twin, you might have a few sleepless nights, but if they make a success of their business, you make money you didn’t have to work for.
Next week, we’re going to look at how much of your money you should be giving to each twin.
Being outstanding with your money doesn’t have to be hard. This series of articles will give you all the tools you need to get your house in order to start investing. Written by Just One Lap and sponsored by OUTvest, this series is the ultimate guide to outstanding money.