Saving and investing: are they compatible?

Unfortunately, most Lithuanians still believe that saving and investing are two completely incompatible activities. Some think of them as sequential steps rather than actions that can be performed simultaneously. However, this is not true; it is possible to both save and invest at the same time. In this article, we want to explain what saving and investing are, the differences and similarities between them, their advantages and disadvantages, how to combine saving and investing, and mention a few other important points.

What are saving and investing?

Saving and investing are two different processes. Saving is an informal process where a portion of income is set aside for specific goals (such as purchasing something, leisure, retirement, etc.). Savings can be kept under a mattress or accumulated in a bank account. It's hard to say which option is safer. Money under the mattress might attract thieves, while the 2008 financial crisis showed that banks are not invulnerable and can also go bankrupt. Investing, on the other hand, involves putting a certain amount of money to work with the aim of preserving or increasing its original value. In other words, it’s a way to protect money from devaluation while also earning returns. You can save while investing: imagine investing €1,000 on a crowdfunding platform like Profitus for a year, and after that, you get back a sum that is about 12% higher. The benefits are obvious—you not only get back the invested money but also increase it.

Advantages and disadvantages of saving and investing

Saving, first and foremost, is putting money aside for the future, consciously accumulating funds for specific goals (larger purchases, trips, children's education, or simply for a rainy day). Investing, on the other hand, is using money to preserve or increase the value of initial capital. Both saving and investing are independent processes that bring different benefits and risks. While investing preserves or even increases the value of the money, simply saving can result in losses due to inflation—savings may simply lose value. However, saved money can devalue in several ways, and investments are not always successful, meaning you can lose them. The biggest advantage of saving is the lower risk of loss, but it also comes with a significant disadvantage—your savings are likely to devalue in the long run. As you've understood, investing offers the potential for capital growth (an advantage), but it is inherently a riskier process (a disadvantage).

Who can save by investing?

Anyone can save by investing, whether they can allocate €100 or €100,000 to the process. However, all financial experts agree that saving through investing is most effective when done without debts. Debts consume a significant portion of available funds, so the profit from investing will not significantly increase your budget in the long run. It is better to allocate your savings to pay off debts first. This will not only make you feel better but also reduce your expenses, which means you can save more, invest later, and earn more. Of course, to earn more, a larger initial budget is required, but you can always opt for periodic investing and gradually invest. You can read about periodic investing in our article "Periodic Investing: What You Need to Know."

How to combine saving and investing?

Saving and investing are two easily compatible activities. Anyone with extra funds can do it. However, for saving and investing to be successful and profitable, a few simple steps must be taken.

Set clear goals for saving and investing

The first and perhaps the biggest step toward successful saving and investing is to set clear goals. Both saving and investing will not yield results overnight, so you should be prepared for a long project, possibly lasting several months or even several years. The time it takes to achieve your goal depends on the goal itself and your capabilities. When making a clear goal plan, you should answer a few questions:

Why am I saving and investing? What is the primary goal (it could be a large purchase, luxurious vacation, preparing for children's education, retirement, etc.)? The goal should be specific.

How long will it take to reach my goal? To avoid disappointment during the process, think pessimistically—set the longest possible time frame.

How can I achieve this goal? Review your finances, assess your capital, income, and calculate how you can reach your goal. For example, if you've set a goal to buy a car for €10,000 in a year by saving, you will need to set aside more than €800 per month. If you choose investing, you will need to set aside less each month since the invested amount will grow your money.

It's very important to think concretely and consciously—if you earn the minimum wage, it's unlikely that you will be able to save the mentioned amount for a car in a year, so before setting goals, carefully assess your financial situation.

Assess the risk of saving and investing

Another important aspect is risk. You will face risks in both saving and investing. It's crucial to properly assess the possible risks and how much of them you can tolerate. Financial literacy experts advise that it's best to save money by investing when you already have a financial cushion (a sum necessary for 3-6 months of living expenses for unforeseen events). This way, you will be insured against unexpected changes, and your investments will continue to work for you.

As you’ve understood, both investing and saving carry risks. Investing, although more profitable than simply saving in a bank, is riskier. Imagine you invest in stocks, and after a few months, it turns out that the company's profit will be used to cover accumulated debts instead of being distributed to shareholders. In this case, your investment will not bring any returns. Saving is also risky due to devaluation and potential bank bankruptcy, so it’s important to carefully consider where you will keep your savings.

Allocate income for saving and investing

Some people often see investing as a way to save. Although this may seem true at first glance—since free money is being put to work—it's important to remember that investments are something you set aside for a longer term, and if you need the money, you won't be able to access it immediately. There is also the risk that the invested amount or the entire sum may not return. Saving, on the other hand, is an unbound process—whenever you need the money, you can take it right away. Therefore, different portions of your income should be allocated for saving and investing. How much to allocate depends on the financial management strategy you choose. According to the 50-30-20 rule, you should allocate 20% of your income to saving and investing each month. If you apply the 6-jar method, then you should allocate about 10% to investing. However, regardless of the model you choose, specialists recommend first having a separate fund (a sum necessary for 3-6 months of living expenses for unforeseen events), and then save money through investing.

Diversify your investments

Different investments carry different risks. Of course, investments with lower returns have lower risk, but if you want to earn faster and more, you will have to accept higher risks. What can you do to make investments less risky? Diversify them. Diversification is the process of spreading investments to reduce risk. For example, investing one part of your money in loans and another part in real estate can significantly reduce investment risk: if you incur losses in one area, the other investments may be profitable enough that you won’t lose a single cent overall. This kind of diversification helps balance the financial portfolio and reduce potential investment risk.

Saving and investing apps

With all the daily tasks and concerns, tracking your finances each time can be exhausting. To make the path to saving and investing easier, experts suggest trying various apps that help track information more easily.

Daily Budget is great for those who want to manage their daily expenses, like to follow rules, and want to see broader information. This app calculates how much you can spend daily and how much you should set aside for savings based on your monthly income and necessary expenses (housing, telecommunications, etc.).

Goodbudget is an app based on the old envelope budgeting system that can distribute your entire budget into separate digital envelopes. One app account can be used by two users, making it the best choice for managing family finances and tracking joint savings and investments.

In addition to these apps, you might also find **Nerd Wallet**, **Pocket Guard**, **My Wallet**, **Acasa**, **Monefy**, **Toshl Finance**, **Spendee**, and others useful.

Control of saving and investing

To achieve financial goals (whether saving or investing), control, determination, consistency, and direction are very important. Control helps you feel safe and confident, which boosts motivation to keep pursuing your goals. As mentioned earlier, you can incorporate control into your financial management by using various mobile apps, a simple Excel program, or by planning and tracking your budget in a notebook or any other place convenient for you.

Successful examples of saving and investing

Saving and investing are easily compatible. To prove this, we want to provide a few examples.

Imagine you have €10,000 and decide to place it in a savings account. At that time, the interest rates are indeed favorable—1.5%. You want to leave the sum for 20 years, meaning that after 20 years, your savings will have grown by €3,468.55, and you will be able to withdraw €13,468.55.

At the same time, you can choose to invest through the crowdfunding platform Profitus in real estate development projects. For example, you decide to invest €5,000 for one year in a project with an annual return of 10%. After a year, your investment has brought you a profit of €500, meaning you got back €5,500. You keep the profit for yourself or set it aside for saving, and invest the same €5,000 again on the same principle. After 20 years, you will have invested 20 times, meaning the same

 initial amount of €5,000 will have brought you €10,000 over 20 years. In this case, by both saving and investing, you will have earned €13,468.55 + €10,000 = €23,468.55. As you can see, the result is more than satisfactory!

It's true, you will face risks when saving through investing. Investments do not always generate profit, and you may incur losses. But investing in low-risk projects and diversifying your investments will not only help you manage risks but also achieve your set financial goals much faster.