Savings: Low Risk, Low Return
Savings accounts are generally considered low-risk because they are often insured up to a certain amount. However, the trade-off is that they offer lower returns, usually in the form of interest rates that barely keep up with inflation. In Kenya, for example, the average interest rate on a savings account is around 4-7%, which may not outpace the annual inflation rate.
Investing: Higher Risk, Higher Potential Return
Investments like stocks or real estate have the potential for high returns, but they also come with higher risks. The value of your investment can fluctuate, and there's a possibility of losing part or all of your initial investment. However, the potential for returns is much higher, often exceeding the rate of inflation.
Liquidity Concerns
Savings: High Liquidity
Savings are highly liquid, meaning you can quickly and easily convert them to cash without losing value. This makes savings ideal for emergencies or short-term goals.
Investing: Varying Liquidity
Investments vary in liquidity. While stocks can generally be sold quickly, other investments like real estate or certain retirement accounts may have longer time horizons and could incur penalties for early withdrawal.