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Invest, save, or spend?

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Every decision you make with your money falls into one of three categories: investing, saving, or spending. It’s useful to understand these, because each one has its own pros and cons.

A bird’s nest with three white eggs in it.

When you put money in a bank account, are you saving or investing? When you buy shares, are you investing or spending? It gets pretty tricky pretty quickly, so we thought we’d explain how we like to think about it.

Keep it simple to start

Here’s our version of some simple definitions:

  • Spending—money you spend now to get something now.

  • Saving—money you put aside to spend later.

  • Investing—money you spend to get more money later.

Easy, right? But if you dig into these, you’ll see that there’s a lot of overlap.

Spending is all about the here and now

Spending is pretty straightforward—it’s exchanging money for a good or a service. When you buy a coffee, you’re spending money and in exchange, you get a hot drink with some caffeine. All very straightforward. 

With spending, you’re less likely to be putting your money at risk (you don’t give money to the barista in hopes that they might give you a coffee later), and there’s not really a time element—you generally get the thing you’re spending money on right now. 

Saving and investing are more similar than different

In general, saving is putting money aside to spend later. Investing is putting money at risk in hopes of getting more money later. 

But practically speaking, lots of things are a little bit of one and a little bit of the other. 

When you put money in a savings account, you’re both saving it and investing it. On one hand, you’re putting money aside to spend later on—maybe it’s an emergency fund, or maybe you’re saving up for a holiday.

But on top of that, the bank will pay you interest. So you’re not only choosing not to spend your money, you’re also getting a small return in exchange for doing so. And you are taking a risk! Putting money in the bank can be viewed as a small risk, but it still has some risk. 

Time makes all the difference 

A big difference between these three things is time. Let’s go back to that coffee. When you buy a takeaway coffee, you expect to get your return pretty much immediately. In fact, you have to. If you wait more than a few minutes to drink it, it goes cold. If you waited a few weeks, it would go bad. Gross.

On the other hand, think of investing in shares. Share investing is usually a longer-term thing than your cup of coffee. When people buy shares, they usually expect their return (more money) further down the track—sometimes years away. Of course, some people buy and sell at a fast pace, but even then, it’s not usually as fast as the time between when you pay for a coffee and when you get that coffee. 

Savings sits in the middle of spending and investing. You don’t get your return immediately, but your return opportunity is also generally smaller than it would be with an investment like buying shares.

The risk factor

The other difference is the risk you’re taking. When you invest in shares, you don’t know how much of a return you’re going to get. It might be 3%, 4%, 5% or more—or you might end up in the negative. 

When you save money, there’s a lot less risk. If you put it in the bank, you can be pretty sure (although not certain) that your savings aren’t going to lose value—but you’re also not likely to gain that much value. The risk is lower than with shares, but generally your opportunity to make a return on your investment is lower too.

Finally, spending your money could be perceived as the lowest risk. When you buy a coffee, you know what you’re getting. You part with $5, and you get $5 worth of coffee. Spending is about getting exactly what you’ve asked for, in the time frame that works for you.

But in exchange for this, you sacrifice potential financial returns. If you saved $4 in a low-interest savings account for a year, you’d probably get at least a few cents in interest—and still have your $4. When you spend $4 on a coffee, you “lose” the entire $4, and get a coffee instead. So the risks are the lowest with spending, but the financial returns are also generally the lowest. 

What does it all mean?

When you bring this all together, you can see how your spending falls into each of the three categories: spending for today, saving to put money aside, and investing to try and turn your money into more money in the future. Sometimes your money activities can fall into more than one category at the same time.

Spending is how you get through the day, because groceries aren’t free. Saving is what helps you buy more expensive things, or gives you a buffer in case of an emergency—you might hear people refer to their rainy day fund! And investing is an opportunity to make money work for you over the long term. 

The mix you choose is up to you—but we reckon it’s a lot easier to make those decisions when you have a clear idea of the differences between saving, spending, and investing.

Ok, now for the legal bit

Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.

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