As we’ve already discussed, saving and investing aren’t the same. Saving is a way to protect your money while investing grows your money. The reason they are so different has to do with what the money does when you’re not looking. Money in a savings account keeps being money. Money you invest, however, becomes an asset.
In this article we’re going to explain what happens to your money when you save it. We’re also going to explain what you can expect to get out. Next week we’re going to discuss how investments turn money into assets and how assets turn money into more money.
Money saved looks the same every day, whether you keep it in a shoe at the back of your cupboard or in your savings account at the bank. The money you put into savings will look the same as the money you take out.
However, the inflation monster only eats cash. Your stack of banknotes will look the same this time next year, but the same stack will buy you less than it could buy you this year. When it comes to saving cash, this is your biggest risk. An amount of money can look really big, but over time it can buy less and less.
What your money does when you’re not looking
If you leave your money in a shoe, you’ll get out exactly what you put in (unless you count the dust and an ant or two). Putting your cash in the bank is a way to get a little more out than you put in.
Banks make a lot of profit from lending people money. When you borrow money, you don’t just pay back what you borrowed, you also pay a fee for using the bank’s money. That money is called interest. Have you ever wondered where the bank gets the money to grant loans? You might be surprised to learn that it’s from your savings.
Interest is a fee for using other people’s money.
When you put your money in the bank, it becomes part of the bank’s balance sheet. The money goes to work in the background. The bank always ensures that it can pay that money back to you immediately, which is why it looks to you like your money is just sitting there when you check your bank balance.
Banks try to encourage you to save your money so they can lend more money to other people. The longer you agree to leave your money alone, the longer the bank has to make money from your money. To get you to save, the bank pays you interest. When you agree to leave your money in savings for a set period, the bank can make that money work harder than money that needs to be immediately available. To entice you to leave your money alone for longer, the bank pays more interest than if you just left your money in a savings account.
What you get out
When you are ready to use they money you saved, you get out the pile of cash you initially put in. You also get whatever interest the bank agreed to pay you. Banks usually pay a lot less interest than they earn, so it’s very likely that you’ll only have a tiny bit more than you started with depending on the type of savings you chose.
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 greatest guide to outstanding money.