The Money Dilemma: When to Invest Instead of Save
To save or invest? If you’re asking that question, then know you’re not alone. It’s actually one of the most common questions we get here at Verve.
While both options have merits and it’s often a good choice to do a bit of both, we’re here to shed light on why investing, particularly with an ethical investing platform like Verve Money, instead of only saving, may be a smart choice for your financial future.
Let’s look at the perks of investing
Protect against inflation
A crucial factor to consider when comparing investing to saving is the impact of inflation. Inflation is the increase over time of the price of everyday items such as groceries and fuel, which means you can buy less with your money. Let’s say a lollipop costs $1 today. If inflation is at 5% per year, next year the same lollipop might cost $1.05.
Now, one of the common misconceptions with investing is that the ‘target returns’ aren’t sufficiently higher than the rate of interest offered on a savings account (which are typically influenced by inflation rates), especially when investing can be seen as riskier than putting your money in the bank.
The problem with this view however, is that even when bank interest rates are relatively high, they often struggle to keep up with the pace of inflation. On the other hand, investment portfolios, such as Verve Money’s Balanced and High Growth investment options, are often designed to target returns that outperform inflation over a specific timeframe, meaning your money retains its purchasing power and continues to grow.
Let’s put this into perspective: In Australia, the current inflation rate is 5.4%. If your bank offers you a 4.35% interest rate, the return on your savings is lower than the cost of living, meaning your money’s purchasing power diminishes, giving you less value when you intend to use it.
But if we consider a managed fund targeting returns above inflation, the experience is quite different. The annual CPI (Consumer Price Index) can vary, but as of the September 2023 quarter, it stood at 5.4%. Therefore, if you choose to invest in Verve Money’s Balanced option, which has a target return of 3% + CPI (or 3% above inflation), this means that you’re targeting a return of 8.4% on your account balance. Put simply, your investment is growing more than the rising cost of living.
So, by just keeping your money in a savings account and not giving it a chance to grow (by investing, for example), you might not be able to buy as many lollipops in the future because the price increased more than your bank balance. That’s why considering inflation is important when deciding what to do with your money.
Align your money to your values
Your bank may also be investing your money in ways that don’t align with your personal values. Many conventional financial institutions support unethical industries by lending money to finance fossil fuels, live animal exports, companies that lack gender diversity, weapons, tobacco … to name a few.
When you choose to invest with Verve Money, you have the opportunity to put your money to work in a way that mirrors your values. Verve invests your money in sustainable and socially responsible projects, such as green bond funds and renewable energy initiatives. We’ve also committed to investing at least 20% of each of our investment options in climate solutions. This means that your investment is making a positive impact on the world.
Believe in superior returns (don’t trust us, trust history)
Finally, a simple but compelling reason to consider investing with Verve Money, or other ethical investing platforms, is the potential to earn more competitive returns compared to traditional savings accounts, over the longer term.
Over the past decade, the return on cash in bank accounts has averaged around 3% per year, whereas investments in the Australian share market have yielded approximately 6.5% over the same timeframe. Investing your money can potentially offer more significant returns, helping your wealth grow at a faster rate than it possibly will in a savings account.
Whilst a well-diversified investment portfolio is not immune to short-term market fluctuations, these fluctuations have less impact if you ride out the volatility and remain invested.
Even after significant market crashes, such as the Great Depression in the 1930s and the Global Financial Crisis in 2008, markets rebounded and surpassed previous highs. Patient investors who stayed invested through these periods were able to benefit from these recoveries. Those who panicked and sold at the market lows locked in their losses. Trying to predict short-term market movements and making frequent trades can lead to lower returns. Long-term investors who stay in the market tend to benefit from its overall upward trajectory.
The information in this graph assumes that $1,000 was deposited into a savings account, and invested into a managed fund. The savings account is assumed to earn a return of 3% p.a. The managed fund account is assumed to earn a return of 6.5% p.a. Earnings are compounded (monthly/annually). No additional deposits or investments are made to the accounts and no fees or taxes are withdrawn from the accounts.
This calculator is a model, not a prediction. Results are estimates only and the actual amounts may be higher or lower.. Fees, expenses and taxes are not considered and would reduce the performance shown if they were included. Actual results will vary. Keep in mind that all investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
This calculator is not specifically linked to the Verve Money Fund. There is no implied alignment with actual or forecast performance of an investment in the Verve Money Fund (earnings, distributions and return of capital). Actual performance of the Verve Money Fund can be much more variable, without any guarantees. Please see the Product Disclosure Statement, the Investment Guide and the Target Market Determination for information about the Verve Money Fund.
This calculator is provided by Verve Money Pty Ltd and does not take account of your personal financial objectives, situation or needs. We recommend you seek financial, legal and taxation advice before making an investment decision. The calculator is not a substitute for your own assessment and is not intended to be relied on when making a financial decision.
At Verve Money we regularly monitor market conditions and performance, and adapt the portfolios to changing economic environments – often referred to as active management. We plan for market volatility so you don’t have to, you can just go ahead and focus on living your life, reaching your goals and investing for good.
Ok that sounds great, but what about saving?
Here are three reasons why you might choose to save instead of invest.
Feel secure with a lower-risk option
Saving money in a traditional savings account means that you’re not subject to short term market movements. If investment volatility makes you nervous, a traditional savings account might give you a feeling of security.
Achieve short-term goals
If your savings goal is a short term one, say, under two years, a traditional savings account may be the preferable option. You generally achieve the most benefit from investing if you invest over a longer time period, say 5 years plus.
There’s also no reason why you can’t achieve a short term goal using a savings account and work on a long term plan to build wealth through investing (you don’t want to have FOMO here, trust us).
Protect yourself with an emergency fund!
There is huge importance in having easily accessible savings for emergencies and short-term needs. This prevents you from having to sell investments during market downturns, allowing you to weather financial storms without significantly impacting your long-term investments, or makes the day your car gets broken into a little less stressful.
Where to from here?
Ultimately to save or invest (or both) is a personal decision and you need to do what’s right for you and your own financial situation.
What we love about investing is that you’re not just stashing your cash away for a rainy day; you’re actively taking steps to grow your wealth. And if you choose an ethical investing platform like Verve Money, you’re also making a positive impact on the world at the same time.
What do you consider when weighing up savings vs investing? And what other questions do you have? Share your thoughts on our Facebook community, we’d love to hear from you.
This article is published by Verve Money Pty Ltd (ABN 71 653 669 366, AFS Representative No. 001294184), a Corporate Authorised Representative of True Oak Investments Ltd (ABN 81 002 558 956; AFSL 238184), as the Manager of Verve Money. A friendly reminder that all the financial information contained in this article is general in nature and does not take into account your personal financial objectives, situation or needs. It’s important to do your own research and consider getting in touch with a professional adviser to access specific information tailored to your unique situation.
You should read the Product Disclosure Statement, Investment Guide, Target Market Determination and Financial Services Guide before making a decision to acquire, hold, or continue to hold, an interest in the Verve Money Fund. Visit www.vervemoney.com.au/documents to view these documents.
Interests in the Verve Money Fund (ARSN 662 622 899) are issued by Melbourne Securities Corporation Limited (ACN 160 326 545, AFSL 428289). When considering financial returns, return of capital is not guaranteed and past performance is not indicative of future performance.