UNDERSTANDING THE DIFFERENCE BETWEEN SAVING AND INVESTING

Most people want financial freedom – and that requires saving and investing. Get to know the difference between the two, then get started.

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Financial freedom is more than being free of debt – although you do need to work at that by cutting unnecessary expenses, reducing the credit you use and keeping to a budget. True financial freedom is about assuring your future freedom, by starting savings and investments that allow you to get the things you need in life, and to relax and enjoy your old age, when you are no longer able to work and earn.

Saving is about putting your money away in a safe place for a specific project like the deposit on a car or home, a new appliance, a holiday or an emergency fund for unexpected expenses. Investing, on the other hand, is about putting your money to work and taking a greater risk than when saving, so you can build wealth in the longer term. Both have pros and cons, and both are important.

SAVINGS ACCOUNTS
These give you easy access to your money, although the period differs depending on the type of savings account you choose. For example, a call account lets you withdraw your money in 24 hours, while a notice deposit means you give a specified number of days’ notice when you want to withdraw cash. A fixed deposit allows you to choose the period of your investment, giving a fixed interest rate for the full period.

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The pros of savings accounts are that they’re stable and low risk. The cons are that the interest rates are lower than for higher- risk investments, and their relatively easy access can allow you to dip into them. Most savings accounts also require a minimum balance or you will be charged a monthly account fee, says independent financial planner Paul Roelofse of Invest for Life.

• INVESTMENT ACCOUNTS
  These have the major advantage of providing higher returns over longer periods through compound interest (when interest is calculated on the interest earned too). They also let you make decisions about how you allocate your funds – the higher the risk, the higher your returns. On the other side of the coin, they are affected by stock market fluctuations and economic crises. They also usually require a minimum deposit or regular debit order, and fees are higher than on savings accounts. There are three main kinds of investments:

• RETIREMENT ANNUITIES
  These are plans designed to rovide a certain income from the time you retire until you pass on. The pros are that you’re guaranteed a regular income for life, and your contributions are tax deductible. A possible negative is that you can’t access your money before age 55.

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• STOCKS AND SHARES
  You become one of many people buying a share in a company listed on the stock exchange. You can make a lot of money if you buy low, sell high and diversify – but it’s risky and you can lose money as easily as you can make it.

• UNIT TRUSTS
  You become one of many investors who entrust their money to a fund management company to invest for you in a wide range of investments. You have experts making investment decisions for you, but most unit trusts entail annual fees, which come out of your investment returns – be aware of that, says Roelofse.

STARTING OUT
When getting into saving and investing, the key is to research the different options, keeping in mind your personal needs for flexibility in withdrawals, and the tax implications and fees, which can vary between companies and plans.

An option is to get the advice of a reputable, qualified financial planner. Major financial institutions have their own, but may steer you to their own products. An independent planner might be a more objective alternative.

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