Putting a little money away regularly is the best way of saving up for expensive things, like a holiday, furniture, or school fees.
There are two ways to save – short term and long term. Savings accounts are for times when you may need to get at your money quickly. They’re different from investments, which are really for the longer term.
Where you put your money depends on a multitude of circumstances related to your own individual needs and desires as well as the state of the economy.
Regardless of your savings and investment choices, you face three kinds of risk:
- interest rate risk (value of your investment changes as interest rates rise and fall);
- inflation risk (inflation diminishes the return on your investment);
- price risk (the actual value of your investment may go down).
When you save money, your capital is secure. You are (usually) guaranteed to get back the sum you put in, plus interest.
When you invest you have no such guarantee. Your capital is at risk. In return for this, you expect to get more back than you put in, plus a little income on the side as well, perhaps. So when you consider any investment you need to ask yourself a few basic questions:
- How much extra return can I expect, and with how much probability?
- Do I really understand what I’m investing in?
- Do I appreciate the risks I’m taking and how volatile this investment could be?