Know When to Invest and When to Save.

Dede is a university graduate who lives in a single room apartment in Accra and works with a privately owned company as a marketer. Dede has crafted her ideal lifestyle and in her opinion, has made the best money decisions up to this point. Every month, she saves GHC 250.00 into her bank account and earns between 1% and 3% per annum. She has already accumulated three (3) years of monthly savings into her bank account and wants to continue for two (2) more years. Her goal is to raise enough money to make a down payment of GHC 20,000.00 for a two-bedroom apartment that is under construction two blocks away from her current address. After five (5) years of saving, Dede walks to her bank feeling accomplished and zestful but unfortunately, she had saved only GHC 16,200 (GHC 15,000 principal plus GHC 1,200 in interest). She is GHS 3,800 short for her down payment. All this while, Dede had been saving when she should have been investing. But how could she tell the difference? And most importantly, how does she know when to save and when to invest? Let us start with the difference between saving and investing.

When you invest, you put off your current spending to acquire financial assets (e.g. mutual funds, treasury bills, fixed deposits, equities, etc.) with the HOPE of having enough money to cover future expenditures. Saving also involves putting off current spending for future use. However, the level of risk associated with saving is much lower. This also means that your interest will be small. Similar to the 1% to 3% earned by Dede on her bank account.

Investing, on the other hand, requires you to take on extra risk. In order to increase your chance of getting a higher return than your bank account, you need to accept a COMFORTABLE level of volatility or illiquidity or both on your investments. For instance, buying a Government of Ghana Treasury Bill at 14% per annum and maturing in 91 days is an investment because you accept some level of illiquidity – you do not have access to your money until maturity in 91 days. 

Let’s move to the second part of our question now. How do you know when to invest and when to save? Saving offers certainty of outcome and instant access to your money when you need it.  Saving is best suited for very short term goals. For instance, depositing money in your bank account towards paying your rent advance which falls due in two weeks – you earn very little interest on your money, but you are certain of your account balance and you can access it at any time. 

Investing comes in when our goals are long term. The case for investing is made clearer after a careful review of life obligations. Everyone takes on different responsibilities at different stages of life – from financing your education, catering for yourself and family, retirement, philanthropy, and finally, bequest. The only asset we all have to finance these obligations is our human capital – offering our services at work in exchange for a regular flow of income/salary. By comparing the monetary value of these obligations to the income/salary received in exchange for our human capital, there is always a gap which requires closing. Investing gives you a better chance of closing this gap. 

Note : The above-mentioned obligations exclude optional spending such as; taking vacations, buying luxury items etc. These expenses widen the gap further and without investing, your chances of covering them will be much lower.

The Achieve app offers you safe investing opportunities through partnerships with licensed fund managers to provide you with safe investment products to help you achieve your financial goals. 

What questions do you have about this article? We would love to hear from you.