When we talk about investing, we mostly mean allocating funds into products or ventures with the hope of receiving more than we allocated. And when we talk about saving, we mean suspending present consumption with the goal of accumulating funds for future use.
However, in order to truly distinguish these two for the purpose of this post, I will like to use the definition of investment in economics not finance. In economics, investment is the purchase or creation of goods not for consumption but for the creation of other goods. So in the economics sense, buying stocks or bonds is not investing, it is saving. Investing is when a business buys a new plant, office building or any other thing meant to increase future production.
Let’s assume that an individual can either allocate money into a portfolio of financial assets or spend it on education, training, a business or work equipment to increase productivity and future earning capacity. So when should one save and when should one invest? It is a function of financial goals, risk appetite and time.
If your goal is to preserve wealth, then saving makes sense. If the plan is to build wealth, then investment is usually the better option as the potential returns are higher.
But then investment comes with higher risk. And if you will suffer irreparable damage by a loss of your funds then saving is the better option for you.
Also, saving is the best option for people without the time to be actively involved in production of goods and services. Those with more time can choose to invest for the hope of higher returns.
Thankfully, our assumption is a simplistic one. In real life, people and businesses can choose to save and invest simultaneously. Most of us have that opportunity and we should try to make use of it taking into consideration our personal circumstances.