Savings and Investment
It is common not to make a difference between savings and investment, as the basis of both is the same, our money. Nevertheless, as we shall see, the main purpose of both activities results in a very different use of my money.
(Difference between savings and investment)
In general terms, we can consider savings the amount of money I do not use today as a provision for the future. The main issue is that my money, no matter how I safe keep it, continues having purchasing power during the period I set it aside to spend.
Savings = $ Safe keep today ► Spend in the future
$ Today ► Buy the same in the future
There are many ways to save my money, a piggy bank, pooling and even a bank. Nevertheless, the election of the way I wish to safe keep my money will have significant implications when I wish to dispose this money to buy a good or acquire a service.
As you can see, notwithstanding, we are encouraged to save during our childhood through a piggy bank, its intention is to create a good habit, nevertheless, it isn’t the best way to save, as the piggy bank does not allow me to maintain the worth of my money, only to safe keep, just as other alternatives like a check or a savings account.
This is the reason why if I wish to maintain my money’s worth I need other alternatives that will allow me to safe keep and maintain it. Accordingly, bank notes are instruments that will allow me to accomplish both objectives. At the same time I safe keep my money, they pay me an interest that allows me to sustain the buying power, during the period of time I decide it is saved.
Bank note = $ Save today ► Maintains worth
The interests paid by these instruments are generally around the inflation rate in order to justify my wish to safe keep my money in a bank and forget the piggy bank. This type of instrument is settled at a predetermined rate for an indefinite term.
Maintain = Inflation ► Rate %
The risk of keeping my savings in this type of instruments is related to the bank that issues the bank note. In general terms, to date Mexico´s bank ratings are high and above other countries, due to the measures adopted from the 1995 crisis.
It is important to mention all deposits in commercial banks have deposit insurance through the IPAB (Instituto para la Protección del Ahorro Bancario) guaranteeing returning the initial deposits plus interests, based only up to certain amount and not on all my resources as is commonly believed, the outstanding initial capital amount saved probably won’t be recovered.
On the other hand, investments can allow me to reach my objectives, beyond protection and safekeeping of my money.
(Features of financial assets)
Investments involve an alternative that money and saving instruments don’t have, the option to maintain and wait for the best moment to make its worth grow.
Investments = Assets ► Option to maintain
$ Today ► Build future wealth
Investments ► Higher profitability
Finally, some of the advantages of investments in financial assets instead of tangible assets are:
• Easy conversion into money;
• Promote and provide assignment of resources in the economy;
• Possibility to have a better balanced price when offered;
• Higher number of participants;
• Possibility to diversify at a lower cost.
In the long run, it is not a decision between saving and investing, as we often think. These two activities are different stages to achieve a common goal, create your wealth.
One cannot consider creating wealth in the short term only through savings; likewise we cannot run before we learn to walk. A saving habit is necessary in order to have resources to invest and create wealth in a period of time.
Once we reach the final goal, meaning the creation of wealth, it will be influenced by the correct allocation of my money between saving and investment instruments. This is the same in an economy, you cannot grow if you don’t invest, as the creation of savings is needed and later be channeled to productive investments that allow them to grow, as an individual we cannot think in making our money grow exclusively by saving.