eBusiness Weekly
Dr Keen Mhlanga
Over the years a greater population has struggled to make decisions when an opportunity of accumulating money knocks at their doorstep. A huge population around the globe has made the question,’ what should l do with money?’ a debatable issue. The decision lies between two lines namely either investing or saving your money. Both decisions provide different opportunities, advantages and disadvantages.
Money is defined as medium stock of exchange characterised by durability, portability, divisibility, uniformity, limited supply, and acceptability hence such characters create a tough decision as to either invest money or save it.
Savings refers to the money that a person has left over after they subtract out their consumer spending from their disposable income over a given time period. Savings, therefore, represents a net surplus of funds for an individual or household after all expenses and obligations have been paid. In other words, it is the money set aside for future use and not spent immediately.
On the other hand, investing is defined as the act of allocating resources, usually money, with the expectation of generating an income or profit. You can invest in endeavours, such as using money to start a business, or in assets, such as purchasing real estate in hopes of reselling it later at a higher price. Both definitions share a common goal which is room to grow or expand one’s money hence the question still remains, saving or investing?
While others opt for saving their money rather than investing it, it is only necessary to outline different methods of saving citizens around the globe engage in. One saves for several reasons such as for a college education, buying a new car, for a new TV set you wish to acquire in three to four months-time, for down payment on a home, or to provide for yourself when retirement comes. As much as there are several reasons for saving, there are likewise many methods in which one can save. In most instances, the best method can be determined by whatever plans you have for the future.
The first common method of saving is having a bank savings account. This method is good for both long and short- term savings because it enables easy access to one’s funds and an individual can deposit and withdraw money to his or her account and earn interest, based on his or her average daily balance. However, a minimum balance is required to be maintained though, and you are charged with a penalty should you fail to maintain it which presents a drawback to opt for this method of saving by numerous individuals around the globe.
The second method of saving is the money market insured accounts which very essential for long-term goals. It generally offers a much higher rate of interest compared to a regular or standard savings account. The interest rate usually is dependent on the amount of money in your bank account; larger balance means higher interest. Although these are the best ways of saving encouraged for individuals, such methods are only common and highly appreciated in developed nations as the USA where interest rates are flexible and prove beneficial to an individual opting to save their money in a bank.
In Zimbabwe despite having banking platforms for saving, citizens resort to their old traditional ways of saving because it proves profitable rather than depositing in their local banks. As a developing nation, interest rates provided by Zimbabwe are not stable and affect one’s decision to save via a bank because at the end of the day one’s deposits amounts to nothing after being affected by unstable interest rates. Therefore, a huge population saving in Zimbabwe conducts the traditional tin method to avoid suffering losses, which can later be criticized to be prone to unforeseen dangers as natural disasters or fire explosions or theft if money is saved under zero security premises, in the case of Zimbabweans their tins inside their houses.
Saving can be oriented by an unplanned emergency or goal. In other words, individuals save in-order to achieve a set of well- known goals such as purchasing assets aspect or leisure performance whilst for others it is for that unknown emergency which can pop up anytime and require monetary assistance. As financial analysts we argue that the motive to save in driven by one aspect and that is the level of income generated or attained by an individual.
High income earners save more than the middle and low- income earners because the middle and lower class spend most on their needs and have little to spare for savings as their basic income on its own is not enough to cater for their needs. Thus, even if the saving rate is invariant with regard to lifetime income, we will observe people with high current incomes saving more than their lower income brethren. Saving caters for a wide range of advantages such as offering a peace of mind.
Knowing that you have a certain amount accumulated for times of your need, gives you the peace of mind. You can lead a stress-free life with the knowledge that you will not have to struggle if things take an unexpected route. Your savings can be the answer to a number of your goals. You can buy a house, accumulate funds for your retirement, or purchase a vehicle. You can secure your future, indulge in the best of things that life has to offer and live a very fulfilling life.
Although there are advantages to saving, investors offer a different opinion for the argument save or invest your money. The general worry amongst most investors is the time value of money. The opportunists and entrepreneurs believe a dollar today is not worth the same tomorrow and in reality, that is the truth and most practical thing about money.
Unlike savers, investors are risk takers as investing is associated with very high risks of loosing or losses towards your invested money. Although in the current world the term investment is being over-used there can only be three types of investment. The first category is the ownership investment which are the most volatile and profitable class of investment following an example of stocks, business and real estate.
Owning stock means owning a portion of a company and more broadly all traded securities, from futures to currency swaps, are ownership investments. Investors purchase them in order to share in the profits, or because they will increase in value, or both. Some of these investments, such as stocks, come with the right to a portion of the company’s value.
Others, such as futures contracts, come with the right to carry out a certain action that will benefit their owners. The money put into starting and running a business is an investment. Entrepreneurship is one of the toughest investments to make because it requires more than just money. By creating a product or service and selling it to people who want it, entrepreneurs can make huge personal fortunes.
Bill Gates, founder of Microsoft and one of the world’s richest men, as well as Strive Masiiwa founder of Econet Telecommunications are prime examples. The last example of ownership investment is the real estate whereby houses are purchased in order to resell or rent out. The second class of investment is lending investment whereby the risks generally are lower than for many investments and, consequently, the rewards are relatively modest.
The third category of investment is the cash equivalents which are “as good as cash,” meaning that they can be converted back to cash easily and quickly. The perfect example is money market fund. Money market funds are similar to savings accounts and can be purchased at any bank. The difference is that the investor commits to leaving the money alone for a period of time in return for a slightly higher rate of interest. The time period is as little as three months and no longer than a year. Money market funds are more liquid than other investments, meaning you can write checks out of money market accounts just as you would with a checking account.
A simple way of classifying investment methods is to divide them into three categories namely Debt investments (loans), Equity investments (company ownership) and Hybrid investments (convertible securities, mezzanine capital, preferred shares). Debt-based investments can be further broken down into two sub-categories – public and non-public (private) investments. Public debt investments are any investments that can be purchased or traded in open debt markets. These are such things as bonds, debentures, and credit swaps, among others.
A company will often classify public securities as held-to-maturity, available-for sale, or held for trading. Each of these classifications has certain criteria and specific treatments under accounting standards. Private debt investments are any transactions that generate an asset on the balance sheet and are not openly or easily traded in markets. An example is the purchasing of another entity’s accounts receivables or loan receivables, which are expected to generate some form of future income. Equity investments can also be categorized as public and non-public investments. The latter is commonly known as Private Equity, which is considered a high risk, high reward investment. In fact, equity investments are generally seen as riskier than debt investments, with the advantage of potentially generating higher returns. Public equity investments are any equity-based investments that can be purchased or traded in markets.
These are often the type of investments that someone has in mind when discussing investments. This covers such instruments as common stock, preferred stock, stock options, and stock warrants. Private equity investments are often larger-scale investments that are not within the scope of a small investor. Leveraged buyouts, mergers and acquisitions, and venture capital investments are just some of the more commonly undertaken types of private equity transactions.
Hybrid investment method is a method mixing both debt and equity. An example of this is mezzanine debt, in which an investor provides a loan to a second party in exchange for equity. Another example is a convertible bond, in which an investor has purchased a bond that has a feature whereby it is exchangeable for a certain number of stock shares of the issuing company.
Unlike saving, investment takes into account the time value of money which enables money to be made use whilst its valuable because a dollar today is not worth the same tomorrow. Saving also ignores the inflationary measures affecting money as it is set aside and stagnant so what it can buy today cannot buy the same item tomorrow but for investment money avoids getting hit by inflation as it made use of in its current highest value.
However, this notion can be further evaluated to investment being affected by inflation because of its returns or profit expected by the investor. An investor risks getting a lower value in return compared to the time the individual initiated that investment. While saving means setting aside part of today’s money for tomorrow, investing means putting your money to work to potentially earn a better return over the longer term.
Different classes of investment assets — cash, fixed interest, property and shares — typically generate different levels of return. ‘Growth’ assets, such as shares and property, have historically had the best overall returns of all asset classes but have also had bigger peaks and troughs.
As an investor, there is the potential to earn capital growth over the longer term as well as an ongoing income return (like dividends from shares or rent from a property. The biggest advantage to investment compared to saving is the fact of gaining additional income by spinning your money into generating more cash. It is possible to earn extra income by investing in quality investments.
The return on your investments might be used as a source of regular extra income for day-to-day living. Or you might choose to reinvest the money to further grow or compound your wealth. While savings accounts offer easy access and the security of guaranteed capital, the returns can be small. Investing in the stock market can provide stronger returns over the long-term, but with a higher level of risk.
While cash is undoubtedly safer than shares, it’s unlikely to grow much, or find opportunities to grow, in the long run. In the past, investors have found rewards over longer terms with investments that come with a level of capital risk. That means the risk that you might lose some or all of the amount you initially invested. Of course, these rewards are not guaranteed. Volatility in the stock market, when stock prices change rapidly over a short period of time, isn’t necessarily a bad thing. In fact, volatility can sometimes offer investment managers the opportunity to buy attractive shares at a cheaper price and get better returns in the long term.
In conclusion, Saving and investing are important parts of a sound financial plan. Whereas saving provides a safety net for unexpected expenses, investing is a strategy for building wealth. Once you have an emergency savings fund of three to six months’ worth of living expenses, you can develop a strategy to grow your wealth through investing. Neither is considered “better” than the other except when applied toward a specific goal. And even then, it’s more accurate to say one is more suitable to specific objectives.
Financial advisors advise building a solid savings for emergencies and retirement before investing in riskier stocks. The reason for this is simple: the fluctuation of the stock market could mean that investors lose money.
If you have nothing in savings and the stock market does poorly, you have no financial resources should an emergency arise. The primary advantage of investing is the opportunity to grow your principal. Unfortunately, this opportunity always comes with the risk of loss. And, unlike deposit savings accounts, most investment vehicles require that you have at least a rudimentary understanding of key investment concepts.
Keen Mhlanga is the executive chairman of FinKing Financial Advisory. He can be contacted on [email protected]; +263719516766
