Should I increase my savings, or should I start investing?
When you start thinking about building assets, don’t you ever have questions like this?
Even if you keep money in the bank, it hardly grows. On the other hand, investing carries the risk of price drops.
Since both have advantages and points to consider, it’s easy to be unsure about what to choose, isn’t it?
Actually, savings and investments are not things you choose between one or the other.
The important thing is to use savings and investments differently according to the purpose and timing of when you will use the money.
In this article, we will explain to beginners how to allocate your daily money while comparing the characteristics of savings and investments.
・Let’s learn the respective roles of savings and investments
First, let’s check the basic differences between savings and investments.
Characteristics of Savings
Savings is a method of keeping money by depositing it in a bank or similar institution.
The main characteristics are as follows:
・The principal of the deposited money is basically protected
・It is easy to withdraw when needed
・You can receive interest based on the interest rate
・There is less concern about price fluctuations compared to stocks, etc.
For example, for money where the timing of use is decided, such as travel expenses for next year or car purchase costs planned within a few years, a method of preparing with savings can be considered.
However, there are also points to note with deposits.
When prices rise, the amount of goods or services you can purchase with the same amount of money may decrease.
In other words, even if the amount deposited in the bank does not change, the actual value of the money may decrease.
Characteristics of Investments
Investing is a method of purchasing financial products such as stocks or investment trusts, aiming for profits through future price increases, dividends, or distributions.
The main characteristics are as follows:
・There is a possibility that assets will increase
・Depending on the product, you can receive dividends or distributions
・It can be used for long-term asset formation
・There is a possibility that the price will fall and the principal will be lost
For example, when managing money that you will not use immediately, such as retirement funds, over the long term, investing becomes one of the options.
However, investing carries risks, and it does not necessarily mean you will make a profit.
Savings and investments each have their own roles they excel at.
・Change where you keep your money based on when you plan to use it
When balancing savings and investments, the most important perspective is “when do you plan to use the money?”
For example, let’s think about it in the following way.
Suppose you plan to replace your car in three years.
If you were investing those funds in stocks or mutual funds, the market might be down when it comes time to make the purchase.
To buy the car as planned, you might have to sell even if you are at a loss.
On the other hand, if the money is not needed for more than 10 years, you may be able to consider long-term investment without being swayed by short-term price fluctuations.
Of course, long-term investment does not guarantee a profit.
The important thing is the mindset of prioritizing safety for money you will use soon, and considering investment for money you will not use for a long time.
・What should you know before starting to invest?
When you hear the word investment, you might think of various financial products such as stock investments or mutual funds.
However, beginners do not need to choose individual products from the start.
First, let’s learn the basic concepts of investing.
1. Long-term investment
Long-term investment is the concept of holding financial products over a long period rather than repeating short-term buying and selling.
While results vary depending on the investment target, the goal is long-term asset formation rather than focusing only on short-term price movements.
2. Accumulation investment
Accumulation investment is a method of investing a fixed amount at regular intervals, such as every month.
For example, this is a method like purchasing 10,000 yen worth of mutual funds every month.
There is no need to invest a large amount at once, and some products allow you to start with a small amount.
However, even with installment investments, there is a possibility of losing the principal.
③ Diversified investment
Diversified investment is a concept of investing in multiple assets or regions rather than concentrating on a single investment target.
For example, there is a method of combining not only domestic stocks but also foreign stocks and bonds.
By diversifying investment targets, it is possible to suppress the impact of price declines in specific investment targets.
However, diversification does not mean that losses will be eliminated.
・Can NISA replace savings?
Many people may be interested in NISA as a starting point for investing.
NISA is a system where profits earned from investments become tax-free under certain conditions.
Normally, taxes are levied on capital gains and dividends from stocks and investment trusts, but eligible profits earned in a NISA account are tax-free.
Therefore, it is a system that people considering long-term asset formation should consider utilizing.
However, there is something to be careful about here.
NISA is not a substitute for savings.
NISA is a system for investment, and the principal is not guaranteed.
If the price of the purchased investment trust or stock falls, your assets may decrease.
Also, products purchased in a NISA account do not necessarily yield a profit when you need them.
Therefore, it is important to use it with surplus funds that can be allocated to long-term asset formation, rather than money that you plan to use in the near future.
・Think about how to allocate money that suits you
So far, we have introduced the differences between savings and investments and how to use them properly.
So, how should you actually allocate your money?
For example, suppose you have 30,000 yen left over to spend freely after paying for your living expenses and other necessary costs from your monthly income.
You do not need to put all of that 30,000 yen into investments.
As one example, you could consider the following allocation method.
This is just one example.
If you do not yet have enough emergency savings, you could also choose to increase the proportion of your savings.
Conversely, if you have already secured the necessary savings and have surplus funds that you can invest for the long term, you could consider increasing the proportion of your investments.
The important thing is not to match the same proportions as other people.
It is to think about an allocation that you can continue without strain, according to your own income, expenses, and future plans.
・Three mindsets to avoid in asset building
Finally, here are some things to keep in mind when thinking about savings and investments.
1. Thinking that savings are unnecessary because they do not grow
While it is important to aim to increase your assets through investment, savings also play an important role.
Having money available when you need it makes it easier to handle sudden expenses.
Avoid putting all of your savings into investments.
2. Thinking that investing will always increase your money
While investments offer the potential for profit, there is also the possibility of incurring losses.
Even if a product has increased in value in the past, future gains are not guaranteed.
Start investing only after you understand the mechanisms and risks of the products.
3. Comparing yourself to the investment amounts of others
On social media and elsewhere, you may see people who invest tens of thousands of yen every month or people who are making large profits.
However, income, living expenses, family structure, and financial situations vary from person to person.
There is no need to invest the same amount as others.
It is important to continue within a range that does not put a strain on your daily life.
・Learn to balance savings and investments effectively
Neither savings nor investments are inherently superior to the other.
It is important to understand the characteristics of each and use them according to your goals.
Let’s review the key points from this article.
・Savings are suitable for money you plan to use soon or money where you want to prioritize safety. ・Investments can be utilized for money aimed at long-term asset building. ・Consider where to keep your money based on when you plan to use it. ・NISA is not a substitute for savings, but a tax-exempt system for investing. ・Start investing with surplus funds and within a reasonable range. ・Do not compare yourself to others; think about an allocation that suits you.
When it comes to asset building, people tend to focus on how much profit they can make through investments.
However, both savings and investments are important tools for supporting our lives and our future.
First, try organizing your money from the perspective of “when will I use it” and “what will I use it for.”
While ensuring financial stability through savings, you can expand your future possibilities through investments.
Combining both effectively is likely the key to sustainable asset building.
※This article is intended to introduce general financial knowledge and does not recommend any specific financial products or investment methods. Investments carry the risk of loss of principal.
For more details on the necessary amount of emergency funds and how to prepare them, please refer to this article.