Building a personal strategy to reach our financial goals can often be a confusing and complicated task, especially when it comes to choosing the best tactics for our circumstances and future plans. Some of the most common questions we ask ourselves revolve around saving and investing: which one better fits my goals or offers better results?
Saving and investing are two financial concepts that, while both aim to grow your money, do not mean the same thing, as they carry different results and risks. In this article, we’ll explain the difference between the two and how you can use them to reach your financial goals.
Saving means setting aside part of your monthly income to cover future expenses or simply to have a financial cushion in case of the unexpected. It involves keeping money in a savings account, a fixed-term deposit, or even cash, where it stays safe and accessible. The ultimate goal of saving is to closely control your spending in order to build a financial reserve that allows you to reach specific short-term goals, such as a trip or the purchase of a vehicle.
Investing, on the other hand, means putting your money to work so it generates returns over the medium or long term. It involves committing capital to assets with the potential to increase in value over time, such as stocks, bonds, or real estate, which carry risk. Typically, the purpose of investing is to reach future goals, such as retirement, children’s education, or long-term capital growth.
Profitability is the benefit obtained from an investment of money made over the medium and long term, generated through the management of resources by a team of experts who build a portfolio with different financial instruments and adjust it depending on the opportunities that arise in the markets.
Examples of saving and investing
Saving:
- Savings account: The most basic and secure form of saving. You can open a savings account at a bank or financial cooperative. Some savings accounts generate returns on the account’s average balance, with interest rates that vary by financial institution.
- CDT (fixed-term deposit): These sometimes offer higher returns than a savings account, but your money will be tied up for a set period (3 months, 6 months, 1 year), in exchange for a fixed interest rate.
- Severance funds: Special funds that Colombian workers are entitled to by law. These funds can be used to buy a home, for education, or for retirement.
- Voluntary pensions: As the name suggests, this is a financial product that lets you save voluntarily to supplement your mandatory pension. The money you save is invested and generates returns over time.
Investing:
Today, there is a wide range of investment options, from commodities like gold to shares of domestic or international companies, and even cryptocurrencies. Here we’ll take a closer look at some investments listed on the stock exchange, that is, those regulated by the Colombia Stock Exchange:
- Stocks: One of the most common forms of investment on the stock exchange. They represent the acquisition of an ownership stake in a company. They give investors the opportunity to share in profits through dividends, which depend on the organization’s performance and changes in the stock price.
- Participating securities: A participating security represents a stake in the ownership of a set of assets or a specific project, rather than a company; this can include stakes in investment vehicles, autonomous trust estates, projects, among others. With this investment alternative, returns are made up of the appreciation of the assets that are part of the investment vehicle plus the income derived from it.
- Bonds: Government or corporate bonds can be understood as “loans” issued by the government or certain companies. By buying these bonds, investors are lending money to the issuing entity and receive periodic returns based on their investment.
- ETFs (Exchange-Traded Funds): These are funds that offer an efficient way to invest in a wide variety of assets, from stock indices to specific sectors or commodities. ETFs allow investors to diversify their investment portfolio simply and affordably.
Which is the better option?
Both financial strategies offer different benefits; the best option for you will depend on your financial goals and risk tolerance. If you’re looking for safety and liquidity, saving is a good option. If you’re looking to obtain higher returns over the long term, investing may be a better alternative.
Before making any financial decision, it’s important to consult a financial advisor to help you choose the best option for your particular situation.
Take control of your financial future!