Saving vs investing

Saving and investing are teammates, not rivals, and they play different positions. Savings are safe and instantly available, but grow slowly. Investments grow faster over long periods, but wobble along the way and can be down exactly when you need the money. Choosing between them comes down to one question: when will you need this money?

What savings do best

Money in an Australian savings account earns interest, is protected by the government's deposit guarantee up to $250,000 per person per bank, and is there in full whenever you need it. That makes savings perfect for the emergency fund and for any goal within the next few years: a car, a trip, a rental bond. The price of that safety is growth. Savings interest often only roughly keeps pace with inflation, so a savings account protects money more than it grows money.

The hidden risk in playing it safe

It is easy to read all this and conclude that savings carry no risk at all. They carry a quiet one. If your savings earn 3 percent in a year while prices rise 3 percent, your money has not grown at all in what it can actually buy, and if prices climb faster than your interest, money sitting safely in the bank slowly loses purchasing power. This is inflation risk, and it is why savings are the right home for money you need soon and the wrong home for money you need in twenty years. Safe from falling in dollar terms is not the same as safe from shrinking in real terms.

What investing does best

Investments like shares have historically returned more than savings accounts over long stretches, which is why they suit goals that are many years away. But the ride is bumpy. Share markets regularly fall 10% in a bad month and 20% or more in a bad year, and nobody can predict when. If you invested your rental bond money and the market dropped the month you needed it, you would be forced to sell at the worst time and turn a temporary dip into a real loss.

The timeline rule

A widely used rule of thumb: money needed within about three years belongs in savings, money not needed for five years or more can be considered for investing, and the stretch in between depends on how essential the goal is. The longer the timeline, the more chances a wobbly market has to recover, and history shows longer holding periods have made losses less likely. Not impossible. Less likely.