You have a small amount of money... is it better to save or invest? It can be hard to tell because these two terms often seem very close. However, they are complementary even if they do not meet the exact same objectives. To answer the question, let us explain the differences between saving and investing and offer a few tips to know where to invest.
Because saving and investing are not the same thing!
Savings is the portion of your income that you decide not to spend. How much will depend on what is left after your normal consumption. Generally speaking, savings meet a deferred spending objective: a new car, going on holiday, a deposit on a home, etc. They secure the present and the near future. But be careful not to fall into the trap of hoarding a "treasure". Hoarding is not good management practice. There are two ways to increase your savings capacity: reduce your outgoings and/or increase your income. To each his or her own.
Investing consists in committing a portion of your money to an economic activity or financial vehicle in the hope of earning an income or capital gain in the not too distant future, but generally after several years.
Saving and investing, therefore, do not share the same purpose. Let's take a closer look at their specific goals.
Saving prioritises guaranteed capital and its availability, to the detriment of financial performance (return). The capital mainly increases through voluntary payments by the saver.
On the other hand, an investment adheres to a risk/reward ratio: the greater the risk, the greater the anticipated reward.
Does that make saving for the skittish and investing for the foolhardy? Not necessarily! First of all, each individual has a different aversion to risk due to their past, temperament or experience. Secondly, the choice to save or invest changes at different times in life and based on different asset goals:
- When you are young and receiving a regular income for the first time, you build up a small buffer to get you started in life;
- Once you reach your thirties, you become a parent, you want to buy a home and you make your first financial investments. Ideally, you should not borrow the absolute maximum you can afford in order to keep some leeway and be able to invest some of your money.
- As you reach your fifties, your income is generally a little higher, the children have grown up, your mind turns to investing to reduce how much tax you pay and/or prepare for retirement;
- Once you're over 60, the goal is usually to ensure your existing assets bear fruit and to prepare to pass them on.
However, although each age brings its own needs, the path to follow always remains the same...
First save (a little), then invest
When it comes to investments, start by building up a savings buffer that is available and not (too much) at risk. Opt for regulated savings accounts because, although they offer only a low return, they are a perfect match for the savings criteria. But remember not to leave your money "languishing" in these accounts because, even if the funds are guaranteed, you will lose purchasing power if inflation is higher than the interest rate...
Once you have your savings buffer you can (should?) think about diversifying your investments and investing in more dynamic vehicles to make your money grow. There are numerous options and your investments should be varied to limit risk. Here are a few examples:
- Multi-vehicle life insurance: freely managed or under mandate, the product combines the security of euro funds with the returns from unit-linked products (shares, bonds, SCPI units, etc.). It also offers very attractive tax breaks after eight years of ownership and is a good tool to prepare to pass on your assets;
- Real estate crowdfunding: you lend money to a real estate developer in exchange for a return of about 10% gross.... a great opportunity provided that you assess the risks and diversify your operations;
- The stock market: with a stock market account or a securities account you can buy shares and bonds to receive dividends or resell with a capital gain. The stock market should be part of a long-term investment strategy to smooth out market volatility over time;
- SCPI units: you contribute to the financing of rental property developments and receive an income from the rents paid. SCPI are accessible directly or through life insurance, a great way of combining the advantages of both;
- Finally, rental property remains a good investment when you have a larger sum of money available.
At Birdee, we offer simple and quick investment solutions, with several portfolios to fit your profile. And as a bonus, you can choose your own vehicle types (sector, SRI, etc.) and benefit from low and transparent fees. So if you've already built up your savings buffer, don't delay, invest with Birdee!