Today we cover the last part on financial literacy components as we revisit the savings and investment components.
In line with requests from farmers to do an in-depth comparison between saving and investing, we will provide pointers on the differences and perhaps similarities between the two from a farmer’s perspective.
Savings are generally meant to hold your money, while investments are intended to grow your money. For instance, savings accounts tend to offer a secure place to keep your funds while you earn a minor amount of interest over time.
On the other hand, investments involve putting money into various assets with the expectation of generating a significant return. The interest earned on investments may come in the form of capital investment appreciation, interest payments, dividends, rental income, or coupon payments in the cases of government bonds. This will all depend on the type of investment.
In the case of farmers, savings accounts or cash holdings may serve as a way to accumulate funds for short-term predefined needs or planning for emergencies. This will ensure that you have liquid readily available cash to cover expenses such as farming supplies and cater for unforeseen circumstances.
However, investments offer greater returns over a long period. Thus, notably the major difference between savings and investments is the time factor. The longer you hold the investment for, the higher the returns of compounding interests.
Additionally, the other important factor to consider is the time value of money when it comes to savings. In simple terms, a N$100 today is worth more than N$100 five years from now when you consider its purchasing power due to inflation. Below are some more differences between savings and investments:
The purpose/intention: Savings generally refer to money set aside for future needs or emergencies in low-risk instruments, and low-interest-bearing accounts. While investments include putting money into assets in anticipation of earning an income or capital appreciation over a given period of time.
The returns: Generally, the interest rates on savings accounts are generally lower compared to the potential returns from investments.
Investments offer the possibility of higher returns, however, the higher the returns the higher the risks sometimes. Specifically, to farmers, for example, investments in agriculture-related ventures can involve risks such as unpredictable weather conditions, such as the drought we are experiencing, market fluctuations, pests, diseases, and many other factors that have an impact on crop yields or livestock profitability.
Diversification of money: Generally, savings tend to be limited to cash or low-risk instruments, which provides stability but also limited growth potential. Investments, however, offer the opportunity for diversification by allocating funds to different asset classes such as stocks, bonds, real estate, or agricultural ventures; this tends to help in managing the risk and overall return. What is important to note is that both savings and investments are necessary, you just have to understand the difference before you make the financial decision on whether to save or invest.
Thus, it’s imperative for farmers to strike a balance between savings and investments, considering their financial goals, risk tolerance, and the specific needs of their farming operations.
Please speak to financial advisors or agricultural experts regarding savings and investment strategies.
Mekupi Kambatuku:
Managing Consultant at Simpli Business Advisory
admin@simpliadvisory.com
www.simpliadvisory.com