The terms “saving” and “investing” are sometimes used interchangeably, but at Franc we think there is a difference.
In our view, saving is the act of putting money aside on a regular basis, whereas investing is using your money to buy an asset with the prospect of capital growth in mind. It's fundamentally the difference between, say, putting money under your mattress (saving) and using your money to buy shares in a company (investing).
Why saving is bad?
Let's be clear, putting money aside is in and of itself a good habit. However, if you leave your money under your mattress or even put it into a bank savings account, it's likely that your money is going to lose value over time - and that's not smart.
Read "Investing to beat inflation" to understand why this is the case.
Investing, on the other hand, is the process of acquiring assets like shares and property so that, one day, the investment can either provide you with income or cover a major expense (like the cost of a child’s education or the deposit on a house). Obviously, the critical question is, "How should I invest?"
So what are the different ways of investing?
As mentioned, investing is fundamentally a process of buying assets that are likely to give you an income and/or grow in value over time. Almost all investments refer to the “rate of return” (or “return on investment”) - the amount of money an investment gives back to you over a year. So if a savings account advertises a rate of 5%, the basic return on investment over one year is 5%, or R50 on a R1,000. The annual rate of return (net of fees) is the most important metric in measuring the performance of any investment. Using annual rates of return you can compare different investment options.
Through Franc we offer users the opportunity of investing in the money market and an index-tracking ETF.
What makes investment decisions difficult is that the best rates of return usually come with some uncertainty. The interest rates on savings products are often guaranteed, at least for a few months, whereas stock market rates of return are unpredicable. Over the last 100 years the stock market has consistently delivered much better returns than savings accounts for long-term investors, but for short-term investors it has sometimes resulted in capital losses.
This is the reason we recommend money market funds for periods of less than three years. If you’re just starting out as an investor your first savings account is often also an emergency fund — in this case you want stability, not returns that fluctuate.
Once you have something to fall back on — enough savings to cover a few months’ expenses, for example — you can start a long-term equity-based investment plan.
In future articles we’ll provide more tips on how to decide on the split between money-market (safe, interest-earning) investments and equity investments.