Risk and reward are crucial factors to weigh when deciding where to allocate your hard-earned funds, and they differ significantly between saving and investing. Saving carries virtually no risk but typically offers lower returns, while investing comes with higher risk but the potential for more substantial returns.
According to Vanguard, Australian shares have generated an average annual return of 9.2% over the past 30 years, compared to a much lower 4.2% return for cash. Given these rates, a $10,000 investment in shares over this time would grow to $138,778, while the same amount invested in cash would only become $34,737 - a significant disparity.
However, while historical data suggests shares outperform savings accounts over the long term, past performance doesn't guarantee future results. Investing always carries a level of risk because values can fluctuate, sometimes rapidly, depending on where and what you're investing in. This unpredictability means there's a possibility of losing your entire investment if things don't go as planned, or if the stock market experiences a correction or crash.
In contrast, savings accounts and term deposits, being bank-based, offer the inherent advantages of security and government backing. They are both guaranteed by the federal government under the Financial Claims Scheme, ensuring that your money remains safe even if your bank faces financial trouble.
To maximise your rewards, it's important to ensure that your rate of return exceeds the current inflation rate, as falling short can erode your purchasing power. Additionally, be mindful of the impact of taxes on interest, which may reduce your overall returns.
In a nutshell, investing involves more risk, while saving provides a higher level of safety and security.