Saving is setting a side some of your money without expecting it to increase in value, while investment is putting some money and expect it to grow in value. Which one is better?

Saving and investment are two sides of a coin. Saving is setting a side some of your money without expecting it to increase in value. You just want it to be there when you need it. By saving it in the bank, at least it is far more safer than keeping it in the fridge. While investment refers to instruments where the value and amount of your money could increase from time to time.

You could have said that by saving money in a bank, it also means that you are going to get some additional value from the interest rate given by your bank. At a glance, Banks offer saving interest as much as 1-3% per annum. But if you observe it, prices of goods also increases during a year. It is sometimes as much, and sometimes even more, than your saving interest. So you realized it now; the real value of your money is reduced if you put it in saving. 

On the other side of the coin, investment actually increases the value of our money, both in real and nominal. Investing your money means that you put it in the form of assets.

Real Asset and Financial Assets

There are two kinds of asset in investment, they are real asset and financial asset. Both can be considered as an invesment tool in reaching your financial goal. Unlike the safety of saving, there will always be risks of losing your money in investment. That's why you have to recognize the assets where you want to invest.

Real asset refers to visible assets, such as land, property, gold, and precious metals. For example, you buy a house and then rent it so that you get monthly income. And then after the rent's ended, you can sell it and receive a certain amount of profit. Profit from this kind of investment is a sure thing; even though prices are going up and down, but it tends to keep increasing in the long term.

Financial asset refers to invisible assets. Generally, you can find financial assets in banks and capital market. Examples of financial assets are : bonds, stocks, mutual funds, etc.

Bonds is notes of debts issued by goverment or company. If you buy bonds, you will get return in the shape of interest from the initial value of your investment that's called as 'coupon'. These coupons will be paid every 3 or 6 months in a year. Bonds has low level of risk. Common risk comes from the possibility that the bonds issuer may not be able to pay their debts back. That's why, there are rating agencies who rates bonds according to their risk.

Stocks is the proof of ownership in a company. People who own stocks have rights on the company's revenue in accordance with the amount of stock they have. This is called dividend. The price of stocks determined by the company's performance. If it has a good performance, the stocks price will be risen and the stocks holder will get the profits. Stocks is also traded in capital market and has high level of risk, due to the possibility of bankruptcy. In stock investment, you have to really know how good the company's performances are. You have to make analyses based on the financial statements issued by the company, economic condition of a country, and many other things.

Mutual funds is a tool for collecting funds managed by Investment Manager and later invested into other financial assets. The funds is being kept in the Custodian Bank. Mutual funds is a solution for people who want to invest in many assets but have limited capital. Mutual funds is the right choice for those who have limited knowledge and information in doing invesment analysis, and also for those don't have enough time to observe stocks and bonds daily movements.

 

Recognizing Characteristics of Investment

Each kind of investment has its own characteristics. Before investing your money, you have to recognize them. Some important points you should note are:

  • The investment's yield potential
  • The investment's level of risk
  • Time period of the investment
  • Ease to liquidate the investment
  • The number of funds you will need to invest in it

In term of the ease to liquidating investment, financial assets are better than real asset; they are easier and faster to be sold. In term of  time period, either real assets or financial assets are devided into 3 time span: short-term (less than a year), mid-term (one to ten year), and long-term (more than ten year).

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If you seek long-term, real assets and stocks are suitable for you. Bonds are better at mid-term. While banking products like saving and deposits are good for short term, they have extremely low profit potential. Beside of them, there is also forex trading which could give you quite high return in short term if you are able to observe the trend.