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Saving vs Investing

July 19, 2022
Easy Equities
Investments

Saving vs Investing.

Saving

Every individual knows what a savings account is. Saving is the act of putting money aside each month to provide capital for whatever it is you intended on saving for. There are many savings account options in South Africa, however, only a few offer interest rates that beat inflation. The average savings account in South Africa offers 3% interest per year. On the other hand, inflation in South Africa is about 4%-7% every year. This means that if inflation is 7% and you earn 3% interest on your savings, you become 4% poorer.

Investing

Investing refers to putting money into an asset such as a business, property, crypto, and much more to earn a profit on your investment in the future. People who invest their money tend to receive profits greater than the rate of inflation in the long term. If inflation is 6% and you earn 10% interest on your investments, you become 4% richer. Over the long term, this can have mind-blowing effects.

Figure 1 is a simple illustration showing the difference between saving and investing:

Figure 2 shows what the difference is between saving R5 000 for 10 years with an interest rate of 3% a year and investing R5 000 for 10 years with a return of 12% a year:

Note: The SA equity market has had an average of 12% over the last 10 years.


The R5 000 saved for 10 years becomes R6 746.77.
The R5 000 invested for 10 years becomes R16 501.93.

That is a massive difference! But wait, we must still factor in inflation:

Lets say inflation is 5%. The total value of the money saved for 10 years would be worth R3 324,16 after inflation and the total value of the money invested for 10 years would be worth R9 835,76 after inflation. So, after adjusting for inflation (-5%) every year, we get R3 324.16 for saving and R9 835.76 for investing. Which one do you think is better? We think that these calculations clearly prove that investing over the long term beats saving over the long term.

This is why investing is so important, it helps us beat inflation and ultimately build wealth!

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