Introduction
In this finance article, I look at savings, investments and properties at a personal level. I base the article largely on literature available on the internet and my own views.
Key definitions
The following definitions are key:
Savings
According to Investopedia, savings involve setting aside money for future use. It is normal for people to keep physical cash as savings or where there is currency stability to keep such savings in a bank account. Savings are normally meant to meet short–term financial goals or prepare for unexpected situations.
People may save for unexpected emergencies such as medical or to raise a deposit towards the purchase of something such as an immovable property or a vehicle. Some people save for their children’s school or university fees.
Investments
On the other hand, investment involves setting aside money and investing it in an instrument or product to grow the money, asset, wealth or net worth. There are many ways people can invest.
One can make money market investments to earn interest. It is also possible to invest in the stock market by buying shares, earn dividends thereon or dispose of the shares when they have gained in value. Some people prefer investing in immovable property to earn rentals or to sell the asset when its value has increased.
Immovable property
This refers to land or land and buildings. This can be in the form of a vacant stand, or land with buildings such as dwelling houses, holiday homes, commercial buildings for shops or office space or industrial properties.
Comparison of savings and investments
According to Investopedia and a Wells Fargo article on savings and investments, the following are some of the comparisons of savings and investments.
Time-frames
Savings are usually short term whereas investments are long-term. Investments are usually made to address a long-term future financial need. It takes time for an investment to grow.
Risk
Savings by their nature is low risk. This is usually because one’s main concern is to have the amount saved readily available when it is needed. For example, savings can be kept as cash in a secure place or bank balances in a stable economy.
It is common for people to save their money in stable currencies such as the United States dollar instead of a local currency.
On the other hand, investments attract risk as one will be taking chances to grow the invested amount. One can realise a gain or loss on an investment such as buying shares or investing a certain amount in a business.
Return
The return on savings is usually nil or very low. Where one keeps cash, the return is nil unless the money is kept as bank balances where some interest is paid. In the case of investments, the return can be higher. However, in the case of investments, there can be a negative return in the form of a loss thereby resulting in a diminution of value.
Properties as investments or savings
My view is that, generally when individuals have extra liquidity, in our economy, they tend to invest in properties such as residential accommodation and to some extent commercial or industrial properties. As far as many people are concerned buying or building such properties is a form of investment.
I opine that it may not always be true that expenditures on properties are investments. What may be viewed as an investment may actually be savings. This can be tested by the need to dispose of the asset or keep it during a period of liquidity challenges.
Ideally, one should live off rentals if a property is truly an investment. The principal investment will be maintained while rental income will meet the investor’s financial needs.
My view is that if during periods of financial pressure, for example during an emergency, upon loss of a job, on retirement, or when a business is struggling, one is forced to sell to access cashflow then the property was a form of saving.
It may happen that initially it was meant to be an investment but if it has to be sold due to financial pressure then it can be argued that it was savings.
I have heard some businesspeople or senior executives saying they want to invest in small or low-value properties to finance children’s university fees.
The spirit is good but the properties may simply be savings that will earn rent in the short term before being sold. Some such properties are sold during emergencies.
Advice
It is also important to have a combination of savings in the form of cash or something easily convertible to cash and investments. Further, when buying a property one needs to consider whether it qualifies as an investment or a saving.
It is better to invest and get good rentals, live off the rental income as this can be done over long periods, instead of investing in many immovable properties that may give low rental income individually. I may make sense to invest a bit more in the same property to create more rentable space or attract higher rent. It may even cost less than what would be required to buy another property.
Conclusion
Savings and investments are not necessarily the same. Not all investments in immovable are investments as some are savings.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), ACCA (Business Valuations) MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, registered tax accountants and advises on deals and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected] or [email protected]. Visit www//:hofisilaw.com for more articles.