People often refer to saving as investing in the future, but it’s important to understand the distinction between these two terms since at their core, they have very different meanings.
This does not constitute advice and advice should be sought in all instances before acting on it.
Saving and Investing: What’s the difference?
Saving refers to the process of putting away money you earn now for the future. Usually people take a portion of their pay cheque and keep it in a specific savings account.
Investing is the process of taking money and putting it towards the purchase of an asset — whether that be property, stocks, funds, etc — anything that the value will appreciate over time or be able to generate an income-like revenue. Instead of putting away that portion of your pay cheque, you use it to buy something that will make even more money for you.
A sound financial strategy will undoubtedly involve both saving and investing, as they serve different purposes for your monetary situation. However, since at the root of investing, the idea is to further your wealth, if you wish to settle into retirement with a healthy retirement fund, you should focus more on investing to build your wealth.
The power of investing
To really see how beneficial investing over just saving is, let’s take a look at an example.
If you start saving £5,000 a year into a Cash Individual SA (with 1% annual interest rate) at age 30, after 30 years you would have around £180,000 in your ISA.
That’s certainly a sizable amount, but as we’ve previously discovered, nowhere near the amount you’ll need for a comfortable retirement.
Imagine instead that you invest that £5,000. You might choose to create a diverse investment portfolio with various stocks and funds and if you’re smart and choose wisely, you could see an average return of 9% at the end of each year, netting you about £750,000 after the same 30 years.
If you continue investing in your retirement, you could even live mostly of dividends and keep your retirement fund very nearly intact!
This result will let you to not only live a comfortable lifestyle in retirement but allows you some additional income to splurge and live luxuriously, at least for the first few years of retirement.
Assess your risk level
It might seem like a no-brainer to start investing aggressively to net the most profit at the end of the day, but this strategy isn’t for everyone. We all have our levels of risk that we are comfortable taking, and investing is no exception. Certainly, being more aggressive when you’re younger is the traditional approach as you can afford to be a little riskier.
Any losses or hiccups you encounter can easily be made up over time. But when you get closer to retirement age, you and your advisor should ensure you’re reaching your retirement fund goal and adjusting your strategy to keep consistent returns coming in rather than big wins every so often.
If you’re not sure what your risk level is, we have a quick, easy-to-use risk questionnaire that will help your advisor with your financial plan. Once we’ve ascertained how comfortable you are with risk, we’ll be able to help you establish a savings and retirement plan that will help get you exactly where you need to be.
Want to build your wealth for the future?
Investments | Financial Planning | Retirement | Save Tax | Protection |
Dental & Medical Financial Services have been helping doctors and dentists to build and protect their wealth, whilst saving tax for over 25 years.