When it comes to building wealth for the future, saving and investing are two key options. But what exactly is the difference between the two? How do inflation and the factor of time influence your choice? And what kind of return can you expect from saving versus investing? In this article, we answer these questions and help you make a well-considered choice. Because let's be honest: your savings shouldn't sit idle in the bank as if they're already retired!
Return is the profit on your investment. With saving, the return is the interest you receive on your savings account. This interest has been very low in recent years – often somewhere between 0% and 2%, depending on the economy and the bank. Saving therefore yields limited growth. With investing, on the other hand, the return can vary greatly, depending on how much risk you take and market developments. Returns between 0% and 30% per year occur in the investment world, especially when looking at longer periods. Naturally: the higher the return, the higher the risk usually is.
We like to say: investing is like gardening – with a little patience, a small plant can grow considerably! (Whereas saving is more like a plant in a pot that grows slowly, unless you give it a lot of time.)
Historical data shows that investing over the long term has almost always yielded a higher return than saving. For example, the S&P 500 index (a well-known stock index) has never given a negative total return in periods of 20 years, while savings interest rates often remained stable but low over those same periods.
Investing naturally entails risks in the short term – prices can fall. But these risks become significantly smaller as your investment horizon is longer. In other words: the longer you invest, the greater the chance that dips in the market will later be compensated for by rises.
Have you ever thought: “Investing seems so risky!” Remember that the market is often patient and wise in the long term. A bit like a wise old owl – it calmly flutters through short-term unrest and eventually lands wisely (read: the market has historically always recovered and grown over sufficient years).
Inflation is the silent killer of your purchasing power. It means that money becomes less valuable as the prices of goods and services rise. For example: if you have €10,000 in a savings account with 1% interest, but inflation is 2%, you are in fact losing purchasing power – your money is not growing fast enough to keep up with the higher prices.
With saving, you therefore run the risk that your capital really shrinks, despite the nominal amount remaining the same or growing a little. With investing, you generally have a better chance of keeping up with or beating inflation, as the expected return is higher than inflation, especially in the long term with shares. Of course, investing is no guarantee, but historically it is one of the few ways to really outsmart inflation.
You can see inflation as that annoying aunt who comes to visit uninvited: you didn't ask for it, but you have to deal with it. Investing can help you at least have a biscuit with your coffee despite her arrival!
Let's compare directly. Below, we list the main advantages and disadvantages of saving and investing:
Advantages of saving:
Disadvantages of saving:
Advantages of investing:
Disadvantages of investing:
(Tip: Always ensure a solid financial buffer for emergencies before you start investing – see our blog on this, internal link, so you don't run into problems if the washing machine breaks down while your money is tied up in investments.)
The investment horizon is the time you plan to keep your money invested before you need it. The longer your horizon, the more risk you can generally take, because you have time to ride out any setbacks. A long horizon significantly reduces the risk of loss.
Why? Anything can happen in the short term – markets can fall due to crises, pandemics, political events. But over, say, 15 or 20 years, these individual events are often small bumps in a rising trend. Historically, broad stock markets have almost always given a positive return over periods of 15-20 years.
Here are some example situations of different investment horizons and what your strategy might look like:
Every investment horizon requires its own approach and strategy, taking into account your financial goals, risk tolerance, and how much time you have to recover from any setbacks. The longer the horizon, the more volatility you can tolerate, because temporary dips are often compensated for by the market later on.
Saving and investing each have their advantages and disadvantages, depending on your financial goals and risk appetite. Saving is safe and maintains your nominal amount, but currently offers little return and inflation nibbles away at the value. Investing can yield higher returns, especially over the long term, and helps to stay ahead of inflation – but involves short-term fluctuations and risks. Time is your friend here: a long horizon makes investing safer and more effective.
Whatever you choose, it is important to understand how factors such as time and inflation affect your eventual capital. Take the time to list your goals and determine how much risk you are willing to take for them.