In Pragmatic Capitalism: What Every Investor Needs to Know about Money and Finance, Cullen Roche explains the difference between saving and investing in simple terms.
Income can only be consumed, saved or invested. The most obvious use of income is consumption, where you buy goods and services. The second use is saving. Saving is setting money aside that is available for future needs. The third use is investing. Investing is using money to buys assets with the expectation that they will rise in value so that a profit is earned.
The primary goal of saving money is preservation, while the primary goal of investing is to grow your money. Here are a few financial goals to further clarify the differences between these two distinct but related concepts: saving and investing.
| Goal | Situation and time period | Saving or Investing? | ||
| Buying a new car |
Your old car is ready to give up the ghost – you need to raise the deposit to buy another car within a year.
| Saving | ||
| Put down a 10% deposit on a house |
In 3 years, you want to stop renting and buy your own house.
| Saving | ||
| Pay for your child’s university education |
Your child is starting grade 1 so you have 12 years to achieve this goal.
| Investing | ||
| Going on an overseas holiday |
In 2 years, you want to go on an overseas holiday for the first time.
| Saving | ||
| Retire comfortably |
You are 25 and would like to retire at 65 – 40 years in the future.
| Investing |
You might want to read more about how you can teach your child about investing.
