Knowing the difference between Investing, Saving & Impact Investing
In the current age, not only is investing important but how you do it makes a difference as well.
Ever since I was a kid, the only good money management lessons that I learned was from my parents. Even in this information & data-driven world, there is hardly anything substantial taught in schools about saving or investing. I made sure that my kid knows how to build his credit and take care of it, spend responsibly, make a habit to save for the rainy days & most important of all create another source of income by investing.
I have heard so many stories of people who make tons of money but end up with nothing solely due to poor money management skills but that’s probably a topic for another day. For now let’s discuss the saving, investing, the difference between the two & the novel concept of Impact Investing.
For a layman, both the terms are used interchangeably, however, there are some obvious differences that need to be understood. It gets categorized as saving or investing depending upon your risk profile, eventual goals & time horizon, etc. As a rule of thumb savings are shorter term, risk-averse & usually smaller amounts while investing has a longer-term perspective that needs constant monitoring with changing times, the performance of your portfolio & risk assessment.
As savings are mostly considered as emergency funds, they are kept mostly in Cash, T-bills or Money market accounts which have negligible returns while Investment portfolio consists of multitude of income-generating assets like stocks, bonds, ETFs and the newly introduced digital assets (Cryptocurrencies, ETN, ETO, etc.) which have long-term objectives of retiring comfortably.
While saving is a pretty straightforward process, Investing takes a little more planning & acumen. Depending on your knowledge Investing, you have a choice of self-directed account or a managed account. The former is only suggested if you have advanced knowledge of the subject & more importantly have the time to manage your account on a consistent basis.
However, if you are like the majority, where you are either not from a financial background or simply don’t have the time then you should opt for a good financial adviser who can understand your risk profile, objectives & goals to build a suitable portfolio matching these metrics.
And finally, I would like to introduce you to the concept of Impact Investing which has started to gain traction recently with the enlightened view of businesses on their role in society. Impact Investing which has traditionally remained localized to development institutions & specialist funds (green bonds etc.) is beginning to go mainstream as investors are increasingly looking towards generating societal benefits apart from achieving personal goals.
The impact investing market increased 5 times between 2013–2017 to $228 billion globally. Common guidelines need to be developed to encourage the institutional investors (who have $100 trillion in assets under management) to invest for impact. This enlightenment would bring Citizens, pension holders, and shareholders together in demanding to invest for impact not just for their future but the society as a whole.
There are a couple of Infographics that follow: the first one shows the macro picture of how investing is affected by the age in the different geographical regions of the world, followed by the qualities that investors look for in a financial adviser. The second infographic provides a complete refresher about saving & investing.
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Originally published at www.datadriveninvestor.com on October 31, 2018.