SBL33 — Reasons Why You Should Invest Rather Than Save
Welcome to SBL36 (Sycamore Business Lab): our periodic blog post where we address issues affecting you and your business.
Following an article we published on April 22, 2020, about ‘securing your wealth and assets with finance’ this article serves as a continuation, to lay more emphasis on assets as an investment and why it is better to invest than to save.
In simple terms, investment means the practice of growing money. An investment is an asset or item acquired with the goal of generating income or appreciation. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future, or will later be sold at a higher price for a profit.
Investments can be stocks, bonds, mutual funds, interest-bearing accounts, land, jewellery, gold, basically anything an investor believes will produce income, usually in form of interest or in other cases, rent. You are an investor, everyone is and can be an investor. At some point in all our lives, we have all practised the act of investing. We have all at some point injected time, energy, intellect, or money into an activity, business, or asset with an expected ROI (returns on interest) within a period of time be it short term or long term.
The difference in Savings and Investments
Just as much as we have all practised investment at some point, we have also practised the act of saving. These two practises can be easily mistaken, but the unique difference between both practices is the concept of risk versus reward.
The investment allows a person to earn higher returns but takes on the risk of loss. Which are most times worth it. Except the majority shy away from risks and loss.
Savings, on the other hand, allows a person to keep money at almost the same value even over a short or long run. Therefore, earning you a lower return and still tied to the risk of inflation. Little do we know there’s also a risk in saving.
4steps to Make Investment Easier with Compound Interest Investment
It is as direct as it sounds, compound interest investment. The addition of interest to the principal sum of a deposit/investment. Simply put, the practice of re-investing your returns or adding the returns to the principal amount and re-investing rather than paying it out.
Here is a compound Interest Investment Plan:
· Have an initial investment (principal): this means the amount of money that you have/had available to invest initially.
· Have a monthly contribution and investment span: this means the amount that you plan to add to the principal every month/week. Set the length of time you plan to keep this investment for. A year, two years or more.
· Estimated interest rate: it is important that you know what your interest rate is in order to determine how much you stand to gain. Interest rates are usually estimated annually.
· Compound your interest: set the time per year that your interest would be compounded. Annually, semi-annually, monthly, weekly, or daily.
Why Invest Rather Than Save
· Creation of wealth.
Unlike savings that could be stagnant and has little or sometimes no returns/earnings on the money kept, investment helps to accumulate and increase wealth with an interest. Especially using the compound interest investment plan
· Financial independence/security.
Financial independence is in no doubt one of the prominent advantages of investing. Making an investment plan, or selecting a good spot to invest in could be a good alternative source of income that would not require you to move a muscle.
· Risk of saving.
Investing rather than saving helps you stay ahead of inflation. This is because inflation defeats the purpose of saving. For instance, an individual saves a thousand naira about a year ago. A year ago, a thousand naira could get this individual a car. The event of inflation by the next year causes the value of that same one thousand Naira to reduce and can only get him a shoe and not a car anymore.
Saving is not a bad practice, but it is better used to achieve short term goals. Investment, on the other hand, is better used to accumulate wealth. Have a rethink to your method/approach to accumulate wealth. At Sycamore, there’s more than enough room for investors (lenders) like yourself, to invest. Sycamore cares.