Savings and Investment. Do these two words represent the same thing? They’re frequently confused and used interchangeably. What is the connection? Saving as a verb has a terrible reputation; I’ve heard people say things like “you can’t save your way to wealth” and point to inflation as a reason for this, but perhaps we’ve misconstrued the objective of saving. Savings will be suboptimal at best unless you have a clear idea of why you’re saving.
Saving is fundamentally a math problem: income minus consumption equals savings. For example, if you make N10,000 and spend N9,000, you will have saved N1,000 immediately. In terms of saving, it doesn’t matter where or how you save that N1000; all we know is that you haven’t spent all of your earnings. Savings has the goal of generating investable income by reducing consumption.
In the context of retirement, a higher savings rate might result in the accumulation of a pool of income that can be saved as Additional Voluntary Contributions, allowing the contributor to achieve his or her retirement income objective sooner.
Investment
So, what exactly is investing? The deliberate action of using saved income in a planned manner to achieve a predetermined goal is referred to as investing.
It is impossible to invest without first saving. Investing in art begins with a series of questions and answers concerning future goals, such as When do you want to stop working? The answers to these questions aid in the development of an investment strategy. In an asset allocation schedule, the investing plan selects assets that match objectives to returns and risk. Many environmental elements, such as inflation, will be taken into account while investing, as they are for all portfolios.
To put it another way, rather than focusing solely on investment returns, investors should also focus on spending, keeping spending under control within established limits. If an investor has a five-year financial goal of purchasing a home and has accumulated capital to invest and grow in order to use as a down payment in the future, the first consideration should be how to consistently generate more savings to be available for investment rather than which asset classes to invest in.
The second stage is to invest those funds in a way that aims to profit from volatility, i.e. risk that creates real returns, while also hedging against severe capital loss. These investments must be set up in such a way that subsequent deposits can benefit from cost averaging.
Without savings, there can be no investment.