One of the basic principles of money management is being clear on the difference between saving and investing. A lack of understanding of this principle means that money is not managed in the best possible way.

Saving is simply the difference between your income and your expenses. The act of saving is no more than setting aside money that has not yet been spent. This money is usually left in a bank account. However, that doesn’t mean it is invested.

Saving is the process of setting aside money to be used in the short term, either to spend or to invest. Investment is something that is done over the long term with the aim of maximising return for future benefit. On the other hand, the purpose of savings is to have money on hand. Return is secondary to ability to get your hands on your money at the time when you need it.

Savings tend to be held in products which are stable in value as you usually need to access this money in the short term, that is, within a five-year time frame. This means returns are lower than if you are investing.

The question is, should you save or invest? The answer is, you need to do both. In reality, all money has to be spent, it’s just a question of when. Money that you intend to spend in the short term needs to be on hand in something that is stable in value and easily accessed. This includes money for emergencies or planned spending such as holidays, home renovations or a new car. Money that you intend to spend much later, say in five years’ time or more, should be invested so that it is able to grow in value and keep ahead of inflation and tax