Saving or investing: how to choose?
We often hear it said that saving “no longer pays”. But is that really true? When and why should we save? Are investments a good alternative?
When your income allows it, it may be worthwhile to set aside some of it to make a major purchase in the future, to smooth consumption over time (income changes over the course of a lifetime, remember) or to pass on a legacy to your children. Unfortunately, as time goes by, the same amount of money can no longer buy the same thing. In other words, the increase in prices (inflation) threatens the purchasing power of the money set aside. So what to do?
Yield, or return, an essential part of gaining purchasing power
The return that the money set aside can offer is therefore a very important element, because it must allow us to maintain, or in the best case improve, the future purchasing power of the money set aside today. If the money is saved, the return is the income from the savings, i.e. the interest on the savings. If, on the other hand, the money is invested to acquire assets (real estate, shares, bonds, etc.), the return is the gain or loss in value of these assets and the income they generate (rent, dividend, coupon).
Savings or investment?
As you can see, the return can be very different depending on what you do with the money you put aside. The key is to make your choice based on the expected return AND the risk you’re prepared to take. Of course, the two are often linked: accepting more risk also means a higher expected return.
Let's take some examples:
Saving or investing? Do the simulation
What can you expect from investing rather than saving? Get an estimate that takes into account the duration, the amount of the investment and the level of risk you want to take.
The time dimension
Taking risks can be scary. But the issue of risk must be demystified and approached objectively, with a cool head!
Let's keep in mind that the risk:
- can be managed and minimised: diversification of the investment allows the risk taken to be reduced (without eliminating it of course).
- is approached differently depending on the time horizon. In other words, the risks you can afford to take are not the same if you know you will need your money in 1 year as they are if you know you will not need it for 15 years. Time is important.
In any case, it is advisable to keep about 6 months’ worth of income in savings, so that you can quickly have the liquidity you need for life's contingencies without taking risks. Beyond that, we can think about investing.
Wave of inflation, rising interest rates... is this a game changer?
After a long period of very low inflation, is the current huge wave of inflation a game changer? Actually, not really. High inflation is "eating" more than usual into the value of the money set aside. For example, the consumer price index, which is the best indicator of general price developments in Belgium, has increased by more than 16% since the beginning of 2021. Therefore, €1,000 at the beginning of 2021 will only have a purchasing power of €861 at the beginning of 2023!
Currently, the level of interest rates is a little higher, allowing savings to yield a little more than in recent years. However, this is still a long way from current inflation (still close to 10%), which is expected to fall later this year. In short, this is an exceptional time, but it illustrates the importance of thinking about where to put your money.