Are You Saving, Investing, or Speculating?

Say you’ve recently come into a substantial amount of money, either from an inheritance, a win at the lottery, or some other financial windfall. If you’d like to do the financially responsible thing and not blow it all on a shopping spree or an overseas vacation, what would the sensible next steps to take be? 

Some people, for instance, would simply set the money aside in a secure bank account in case they need it in the future. Others would invest the money in securities of some kind, such as stocks, bonds, or even a nontraditional asset like cryptocurrency. The truly adventurous might even look into trading less mainstream altcoins like the privacy-focused Monero, which uses such sophisticated security protocols that can transfer coins safely through a specialized XMR wallet.

Many financial experts would say that you have three options when it comes to managing wealth: to save, to invest, or to speculate. Understanding the difference between these three activities can help you stay on top of your financial plans, grow your wealth, and secure a stable source of monetary value well into the future. Let’s take an in-depth look at saving, investing, and speculating to better understand the differences between them. 

What Is Saving?

Saving involves setting aside a portion of your earnings, either for a future purchase or as a safety measure against emergencies. You generally want to store your savings in a place that you can access easily with minimal to no risk, such as in a dedicated savings account or a fixed deposit account.

The driving force behind saving is the desire for financial security, such as when people put away substantial portions of their income for their eventual retirement. If your primary interest is in growing your income, do note that money kept in savings accounts only tends to earn a small amount of interest over time.

As a tradeoff for these low returns, however, you face no risk of losing money when you use a savings account. You’ll also only have to contend with minimal fees, such as maintenance fees or penalty fees for allowing your account to fall below its maintaining balance. One final perk of saving is that it’s a relatively straightforward, easy process, without a substantial learning curve, complicated business terminology you’ll have to learn, or upfront costs.

What Is Investing?

If you’ve managed to accumulate some healthy savings, it may be a good idea to funnel some of your earnings into securities like real estate, stocks, bonds, or other assets that you can buy and sell to generate more income. Investing products tend to see much higher returns than savings accounts do over time, and they’re also generally quite liquid, which means that any securities you invest in can easily be converted to cash on any given weekday. 

Investing does, however, tend to demand more from people than saving does in terms of financial literacy and business acumen. For many, the process of deciding where and how much to invest their money typically involves extensive analysis and research, often with the aid of a professional financial advisor. Determining the ideal investment strategy necessitates an understanding of how market factors affect the value of certain assets.

Another challenge when it comes to investing is that even if the returns are potentially great, they’re also not guaranteed. There’s some chance that you may lose money, especially in the short term and depending on how the value of your assets rises or falls over the first few years. The general health of the economy and the timing of your sales may also affect the quality of your returns. 

Lastly, it’s worth noting that investments are long-term financial engagements. Typically, money that’s stored in an investment account should be left to sit for at least five years. As a general rule, it’s recommended for investors to hold on to their investments for as long as possible to give their money time to grow—which means that any money they invest won’t be accessible in the short term.

What Is Speculating?

Speculating, unlike traditional investment, involves putting your money behind a high-risk financial transaction that also promises equally high rewards. Speculation normally involves non-traditional assets like gold, fine art, and cryptocurrencies. High chances of failure, extreme price fluctuations, and fickle market conditions are all common features of the speculative trading experience.

While many critics of speculative trading liken it to gambling, seasoned speculators like to argue that they conduct thorough research in order to navigate tricky markets and turn a significant profit. Speculating is typically a short-term endeavor in which traders monitor the short-term price movement on a particular asset, aiming to buy when value is low and sell when it’s especially high. 

One of the most extreme examples of speculation is day trading, wherein speculators buy and sell assets over just a few hours in the hopes of bringing in a higher return. Though other kinds of speculation may ask the trader to hold their assets for longer, such as for a few days or weeks, fast and frequent buying and selling is a general characteristic of all speculative financial endeavors.

Saving, investing, and speculating are all strategies to help individuals accumulate more money. They do, however, differ substantially in terms of their purpose, as saving is more concerned with preserving wealth while investing and speculating are strategies for growing wealth. These three activities also differ in terms of the financial risk they present, as saving poses the smallest amount of risk, speculating the largest, and investing a low to moderate amount.

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