Saving versus investing

There is a huge difference between saving and investing. You cannot invest if you don’t save, but you can save without investing. This is what most people do. Many European countries for example have very high level of savings, and so does Japan. Does this mean people are getting richer from their savings? No, because they save without investing. There used to be a time, decades ago — this is still the case in fast growing developing countries — where the typical savings accounts offered by banks used to pay you interest — maybe 3%, maybe 4% maybe even more. So putting your money in such an account made some sense — although you could have made a lot more by investing it better than simply putting it on your bank’s standard savings account of course. But in today’s world, where many savings accounts offered by banks pay us close to 0% interest, understanding the difference between saving and investing has never been more important.

This is why the most important investing advice anyone can give us, is to start today. Let me show you this by showing you what happens when you invest with compounding, only 100USD each month, for 10, 20, and 30 years:

I want you to look at two things here:

1. Investing 100USD per month will result in an incredible amount on your investment account one day:

a. In 10 years you will have 16300 US dollars

b. In 20 years you will have 46000 US dollars

c. In 30 years you will have 98000 US dollars

2. I want you to see the difference between saving without earning interest or returns, which is something many of us do [in yellow on the graph, these are your savings/capital you saved], and investing with interest/returns [in blue on the graph, these are your savings but invested over the same period of time]:

a. If you save 100 US dollar per month for 10 years you will have 12.000 US dollars. If you invest them at 6% per year however, you will have 16300 US dollar, or more than 25% more than if you save without investing

b. If you save 100 US dollars per month for 20 years, you will have 24.000 US dollars. If you invest them at 6% per year, however, you will have 46000 US dollars, or almost double than if you save without investing

c. you save 100 US dollars per month for 30 years, you will have 36.000 US dollars. If you invest them at 6% per year, however, you will have 98000 US dollars, or 2.7 times, almost triple, than if you save without investing

And the more time passes, the larger this amount you have will become, and the larger the difference between investing and saving will become.