Most people navigating their personal finances will at some point need to decide between the security of saving and the allure of the potential gains from investing. The choice is a nuanced one that depends on your financial goals, risk tolerance and time horizons, with benefits and drawbacks to both.

With both investing and saving, there are plenty of people out there who, with the benefit of hindsight, regret their decision. Some people lose everything from bad investments, while others who play it safe might miss out on the next Tesla or Apple stock.

As with any decision made under uncertainty, all you can do is inform yourself as best as possible, and try to find the course of action you think is most likely to benefit your specific situation. If you have a wedding or a holiday to pay for in a year's time for example, you might not want to risk losing money to short term fluctuations in the stock market, so you might choose to save.

On the other hand, if you’re looking to build for the future, you might be satisfied by the long term prospects of the stock market.


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High Interest Savings Account (< $250k)

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        Savings Maximiser (<$100k)

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          Saver Account (<$250k)

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            Why saving is better than investing

            People who keep their money in savings accounts or term deposits are an important part of the financial system. Customer deposits tend to be one of, if not the, biggest sources of any bank's funding, which is why banks compete with one another to offer competitive interest rates on deposits to attract more.

            If you like, you can think about it effectively as the bank borrowing from you, but you can be paid back in full whenever you want.

            Deposit products are less risky

            It’s far less risky to put your money in a savings account or term deposit compared to investing. Whether it’s property, the share market or other securities, the value of any investment can go down as well as up. Returns are never guaranteed, and you don’t have to go far to find examples of people who have lost big on investments that seemed safe.

            One of the major benefits of savings or term deposit accounts is that you are always protected from losing your money. Even in the event that your financial institution collapses, the Australian Government guarantees deposit holders will be reimbursed up to $250,000 under the Financial Claims Scheme (FCS). Since the FCS was introduced after the Global Financial Crisis, there have been zero claims, which gives you some idea of the likelihood of your bank going under.

            Avoid short term volatility

            Investing into the stock market can leave you at the mercy of short term fluctuations. Below is the past ten year performance of the ASX 200 Index, which is often used as a proxy to measure the market as a whole. While the index trends upwards in the long run, shocks like the Covid-19 Pandemic can mean major short term losses.

            Imagine a couple who decided to invest their wedding fund into a selection of ASX 200 companies at the end of 2019, ahead of a 2021 wedding. Even though by 2024, they might have recouped most of their losses, that wouldn’t have been much comfort when the time came to pay for the wedding, having lost more than 25% of what they started with.

            If you put your money into a deposit product, you can rest assured the returns you receive will be as advertised, providing you meet the product’s terms. If you put $10,000 into a one year term deposit product at 5% p.a, you can guarantee you’ll receive $500 in interest once the term is up. For planning and budgeting for expenses within the next couple of years, this can be particularly useful.

            Raiz - a micro-investing app - to the time of writing has posted a 5.25% return over the past 12 months on its ‘Aggressive’ portfolio. Many of the top savings accounts yielded better than this.

            Liquidity

            Another advantage of deposit accounts over investing is the funds tend to be easier to access. Liquidity refers to how quickly an asset can be turned into cash. To get hold of money that’s tied up in investments, you need to sell the assets first. If you’ve got a low-volume stock, this could take longer than anticipated.

            These days, share trading platforms mean this can be done within a couple of days, but if you’ve got your money in a savings account or a term deposit, you can likely access it virtually instantly. However term deposits are slightly less liquid due to many requiring at least 31 days' notice to withdraw, as well as withdrawal penalties.

            For money set aside for emergencies and other unexpected costs, liquidity should be among the primary concerns.

            Costs

            Savings accounts and term deposits are usually free to setup and nowadays don’t carry any monthly account keeping fees. Share trading usually carries a few costs: Brokerage, which is a cost you incur every time you make a trade; management fees in the case of index funds, which are deducted from the total capital gain; and ongoing account keeping fees if you’re using an app such as Raiz.

            Why investing is better than saving

            Any asset bought with the expectation its value will increase over time is an investment. There’s a wide range of things out there you can invest in, like:

            • Stocks

            • Index Funds and Exchange Traded Funds (ETFs)

            • Real estate

            • Government issued bonds

            • Financial derivatives

            • Commodities like Gold

            • Cryptocurrencies

            Investing is a term that includes an extremely broad range of strategies, some of which are almost completely opposite. There’s very little chance of the Australian Government defaulting on a Treasury Bond you hold for example, whereas investing in obscure cryptocurrencies tends to be like backing a 50/1 horse. Riskier investments can have higher upside, but are also often a great way to lose everything.

            Read more: Is real estate a better investment than shares?

            For the purposes of brevity, we’ll focus this article on share trading. Other forms of investing, such as derivatives and cryptocurrencies, carry a whole separate consideration for risk.

            Potentially much higher returns

            The main reason to invest is the potential returns are significantly higher than deposit products. Let’s imagine you had $10,000 at the end of 2018. If you had invested this into Blackrock’s iShares S&P ASX 200 Exchange Traded Fund (ETF), which spreads exposure across the largest public companies in Australia, that $10,000 would have turned into about $15,000 by the end of 2023.

            That’s a 50% gain in five years, or 10% p.a. - comfortably higher than any savings account or term deposit rate in this period. That’s a five year period that includes the significant downturns of the Covid-19 recession and the cost of living crisis of 22/23.

            Now let’s say you choose deposit accounts instead. This is how your investment would have played out, at the average term deposit rates (per the RBA).

            Start Date

            Value

            Deposit product

            Value after deposit term

            December 2018

            $10,000

            The average return for three year term deposits was 2.35% p.a.

            $10,705

            December 2021

            $10,705

            In December 2021, the average return on one year term deposits was 0.30% p.a

            $10,737.13

            December 2022

            $10,737.13

            By December 2022, the average return on one year term deposits had risen to 4% p.a

            $11,166.62

            Even if you somehow had managed to earn 4% p.a for the full five years, you would still only have $12,166.52. The hidden risk of choosing to save rather than invest is the opportunity cost, or the amount you could have earned had you invested the money instead.

            Dividends and franking credits

            Dividends are an additional income stream investors who hold stocks in certain companies can benefit from. Companies often distribute a portion of profits to shareholders, as an additional incentive to hold shares in the company.

            Investors often make a distinction between growth stocks, usually smaller companies that reinvest most of their profits, and dividend stocks, typically larger, established companies that give more dividends, but are less likely to grow. CommBank, BHP and Rio Tinto are among the blue chip stocks in Australia that traditionally give out big dividends to shareholders.

            In addition, you may receive franking credits, otherwise known as imputation credits, with your dividends. These are essentially tax rebates to the rate the company paid, and the theory is: The company has already paid tax on its profits, so why should you pay tax again on them? Franking credits can then be offset against your income to reduce income tax payable.

            Capital gains tax discounts

            There can be a big difference at tax time between savings and shares. Savings is classed as taxable income, so if you made $2,000 in interest and $70,000 employment income, you’d be taxed as if you’d earned $72,000, falling into the 30c tax bracket from 2024-25.

            On the other hand, gains from shares face capital gains tax (CGT). With CGT, after 12 months, the rate is halved. So, for example, if you fell into the 30c tax bracket, you’d ordinarily face a 30% taxation rate on capital gains on shares held for less than 12 months. If you’ve held them for longer, it’s halved to 15%.

            Using that example from earlier - $2,000 in interest at $70,000 employment income would give you a net gain of $1,400. For shares, of which the capital gain is $2,000 as well, and held longer than 12 months, you’d have a net $1,700.

            Diversification

            Spreading your investments allows you to minimise your exposure to any one asset and can lower the risk of investing. If you can develop a diverse portfolio, you might be able to mitigate the risks that might be scaring you away from investing.

            An increasingly popular way to spread exposure is to buy units in funds that hold stakes in a variety of different companies rather than individual stocks themselves. For example, the aforementioned ETF aims to encapsulate the overall performance of the 200 largest corporations in Australia. It’s effectively a bet on the Australian economy as a whole, rather than individual companies, which some people see as a safer option.

            Stay ahead of inflation

            Deposit products may offer guaranteed returns, but might also not keep pace with inflation. From March 2022 to the time of writing, quarterly inflation has been above 5% p.a, peaking at 7.8% in December 2022. For the most part, the inflation rate has been well above the maximum rates available for savings accounts or term deposits, which means in real terms, savers went backwards.

            If you are earning 5% p.a on your savings, but inflation is at 6% in the same year, your money is worth less, because your purchasing power decreases. While there’s no guarantee investments will exceed inflation either, it’s important to keep in mind there are still risks to playing it safe with deposit products.

            Low maintenance

            Unless you’re a day trader or looking to pick individual stocks and keep an eye on shares every day, if you’re reading this article you’re probably after something fairly low maintenance. One way to get into the share market in a low maintenance way is through an ETF.

            With an ETF, for example, you can buy into it once, set and forget. With the top savings accounts, you usually need to jump through a series of hoops to get the highest rates. For example, minimum deposits, card transactions and keeping the balance under a certain limit.