Saving vs investing: which is right for you?

There are two main strategies for planning your finances: saving and investing. Both are important for achieving financial security, but there are important differences between them. In this article, we explain the differences between saving and investing and help you choose a strategy that suits your goals and risk tolerance.

What is saving?

Saving is putting money aside in a safe place, such as a savings account or a piggy bank, for future use. Saving focuses on preserving money and taking a small risk. Money saved is usually easily accessible and can be used for unexpected expenses, short-term goals or major purchases.

What is investing?

Investing is putting money into assets, such as shares, bonds, real estate or funds, with the aim of earning a return and growing your capital. Investing focuses on growing your money and taking more risk. The value of investments can fluctuate and even fall, but in the long run there is the potential to earn higher returns than saving.

Comparison between saving and investing

Tegur	Saving	Investing
Purpose	Preservation of money	Raising money
Risk	Low	Higher
Production	Low	Potentially high
Liquidity	High	Madalam
Time	Short term	Long-term

Risk

Saving is generally lower risk than investing. The value of investments can fluctuate and even fall, while savings are usually more secure.

Production

Investing offers potentially higher returns than saving. Returns on savings are usually low, especially in a low interest rate environment.

Liquidity

Savings are usually more liquid than investments. Savings are easier to access, while selling investments can take time.

Time

Investing is a longer-term strategy than saving. Investments need time to grow and generate returns.

When to invest and when to save?

Saving and investing are not mutually exclusive strategies. In fact, they are both essential to achieving financial well-being. It is important to find a balance and choose a strategy that suits your goals and risk tolerance.

Saving is appropriate:

To achieve short-term goals: If you need money in a short period of time, for example to buy a car, for a trip or for unexpected expenses, saving is the best option.
To set up an emergency fund: It is recommended to have emergency a fund to cover 3-6 months' living expenses. This fund should be easy to access and low risk, so a savings account is a good choice.
If your risk tolerance is low: If you are not prepared to take the risk of your money falling in value, saving is a safer option.

Investing is appropriate:

Achieving long-term goals: If you have long-term goals, such as saving for retirement, buying a home or financing your children's education, investing is a better choice. Over the long term, investments have the potential to earn higher returns than saving.
If your risk tolerance is higher: If you're prepared to take the risk that your money could fall in value, but also have the potential to earn a higher return, then investing is for you.
To fight inflation: Inflation reduces the purchasing power of money over time. Investing can help you keep up with inflation and maintain the value of your money.

Practical advice

How to start investing?

Define your objectives and risk tolerance: Before you start investing, it is important to know what you want to achieve and how much risk you are prepared to take.
Do your research: Explore the different investment options and choose the ones that suit your objectives and risk tolerance.
Start small: You don't have to be rich to start investing. Start with a small amount and gradually increase it.
Diversify your investments: Don't put all your eggs in one basket. Invest in different asset classes to reduce risk.
Be patient: Investing is a long-term process. Don't expect quick results and don't be discouraged by market fluctuations.

How to diversify your investments?

Scattering is an important risk mitigation strategy. This means investing your money in different asset classes, sectors and geographical areas. In this way, you reduce the risk that the failure of one investment will affect your entire portfolio.

How to choose the right investments?

Shares: Shares are securities evidencing the ownership of the company. The value of shares can fluctuate, but over the long term they have the potential to earn higher returns than other asset classes.
Bonds: Bonds are loans you make to companies or governments. Bonds are generally less risky than shares, but they also offer lower returns.
Real estate: Property is a physical asset, such as land or buildings. Real estate can be a good long-term investment, but it is also less liquid than shares or bonds.
Funds: Funds are investment funds that invest in different asset classes. Funds offer investors the opportunity to diversify their portfolio and invest in a professionally managed portfolio.

Risks to saving: inflation and loss of purchasing power

While saving is an important part of financial planning, it is also important to be aware of the risks involved. One of the biggest risks is inflation, implying an overall increase in the prices of goods and services over time.

Inflation reduces the purchasing power of money. This means that for the same amount of money, you will be able to buy fewer goods and services in the future than you can now. If you keep your money in a savings account with a low interest rate, inflation can reduce the value of your savings over time.

For example, if inflation is 2% per year, the value of €100 will fall to €98 after a year. If the interest rate on your savings account is lower than the inflation rate, you will actually lose money.

In addition to inflation, there are other risks associated with saving, such as:

Bank failure: Although this is rare, it is possible that a bank will fail and you will lose your deposits. In Estonia, deposits are guaranteed up to €100 000, so the risk is relatively low.
Exchange rate risk: If you keep your savings in a foreign currency, fluctuations in the exchange rate can affect the value of your savings.
Liquidity risk: If you suddenly need your savings, you may not be able to get them straight away. For example, if your money is in a fixed-term savings account, you will have to pay a penalty for withdrawing it before the deadline.

Summary

Investing is an important part of financial well-being, providing a way to grow your money and secure it for the future. This article has provided an overview of the basics of investing, starting with different investment options and ending with practical advice for beginners.

Awareness and strategy are key to successful investing. Before you start investing, it is important to set clear goals, assess your risk tolerance and choose investments that meet your needs. Diversification is also important to reduce risk and maximise returns.

Remember that investing always involves risk. It is therefore important to do thorough research and, if necessary, consult a financial adviser. Investing is a long-term process that requires patience and discipline.

We hope this article has given you the knowledge and motivation you need to enter the world of investing.