The difference between saving and investing
Susanne is 37 years old and works as a carpenter in a small business. With her salary, she is able to pay for all her everyday living expenses. Until recently, when she had money left at the end of the month, she put it into a savings account. It was only a short time ago that Susanne made a conscious decision to learn more about saving and investing. She realized how important this is for her financial future. That is because she became aware that she could not only build wealth and have a secure financial future, but also realize some of her dreams that she thought were out of her reach.
Susanne is not the only person who can benefit a lot from understanding the differences between saving and investing. Everyone whose income exceeds their expenses can save and invest to reach important financial goals with greater ease.
Differences between saving and investing
Both saving and investing are essential to building a solid foundation for your finances and achieving your long-term financial goals. For good and sound financial planning, it is important that you know the differences between saving and investing.
| Saving | Investing |
|---|---|
| Putting money aside, to afford larger expenses | Build and increase wealth in the long term |
| Example: new bike, vacation, washing machine | Example: Retirement provision |
The primary goal of saving is to build financial reserves to pay for needs such as a vacation, a new car or professional training. It is important to put money aside to be able to pay for major and/or unexpected expenses. If your washing machine breaks or your car needs a major repair, it is important to have enough savings to quickly pay for these expenses. It also makes sense that you save money every month of the year so you can afford a summer or winter vacation.
If you decide not to put all your money in a piggy bank or in a current account but transfer it to a savings account, you can put it to work and make your money grow. That is because your bank pays Interest on your deposit (interest rates on current account balances are comparatively low). This is important because your money loses its value due to Inflation. By choosing a suitable savings product, you can reduce or completely avoid this loss in purchasing power.
There are a number of different savings products to choose from. Saving is mainly about maintaining the value of your money and not so much about growing your money. That is why savings products usually have lower risk and lower returns than investments.
Investing is mainly about building long-term wealth and/or growing your existing wealth by putting your money in a broad portfolio. It involves buying assets such as shares, bonds and real estate, with the aim that your money grows over time. Although investing involves more risk, it also offers the chance of higher returns, compared to saving.
Regardless of how you save or invest your money, it is important to know where your money is going. Before you invest your money, you should be aware what companies you are financing. For example, you can ask yourself whether these companies have inhumane working conditions, benefit from wars, and whether they destroy the climate and the environment. When making responsible investments, it is therefore particularly important that you do your research to find out what the money saved and/or invested is used for. Even if it takes some time, it is worth the effort because you can make better decisions about the money you are investing. When doing your research, look for certificates such as the Austrian Ecolabel for Sustainable Financial Products (UZ 49) that can provide some help. See the Ecolabel website for more information.
Investors tradeoff
Investors have a number of conflicting objectives. For example, they want low risk, high returns and the ability to quickly access their money at all times. These objectives are related but it is impossible to fully achieve all of them at the same time. No investment offers maximum returns, minimum risk and the ability to quickly sell (liquidity).
It is a fundamental principle that the lower your risk, the lower your return. The opposite is also true: The greater your return, the greater your risk.
Another important investor objective relates to the sustainability of their investments. There is no tradeoff between this objective and the three other objectives. Instead, it should be seen as a fundamental additional objective. For more information, see Sustainability and ethics.
The triangle below illustrates the three investment objectives of risk, return and liquidity:
Risk relates to the likelihood that you might lose your money. Different kinds of investment have different risks. One risk is that you do not get the money back that you invested. In addition, you should take into account political and social problems in countries, keep track of market developments and be aware of changes in tax law. With a balanced asset allocation, you can reduce risk. This is called Diversification.
Liquidity means how easy it is to sell assets and convert them into cash. Assets like bonds, shares and funds can normally be sold quickly. However, the market price might be below the purchase price. In that case, you would sell at a loss. To avoid losses, it is advisable that you always keep a cash reserve in a savings or current account in case you need money urgently.
Return measures the profitability and success of an investment. Investment income can be derived from interest and dividend payments as well as other distributions, and from capital gains resulting from an increase in the price of an asset. This income can be regular or irregular, distributed or accumulated, and remain stable or change over time.
Rate of Returnis a ratio that can be used to compare the profitability of various assets. It can be calculated as the annual profit on an investment, divided by the amount of money invested (capital employed). To assess the actual profitability of an investment, you have to consider the real rate of Return The real rate of return indicates the actual return on an investment, considering all costs and adjusted for Inflation.
Example
An investment pays interest at a rate of 3%. The rate of inflation is 5%. The real rate of return, i.e. in this case the real interest rate, is a negative 2%. This means that the investment is losing money.
The triangle above shows that investing involves tradeoffs. For example, a riskier investment can produce higher returns, but that comes at the cost of safety. Every investor has to make their own decisions to find the right balance between risk, return and liquidity that suits their personal objectives and risk tolerance.
The weighting and ranking of these criteria is determined by investor preferences. Financial and investment advisers can help you define your personal goals and develop appropriate investment strategies.
Sustainability and Ethics
Investors have a wide range of different financial products to choose from. They can support companies and projects that are socially responsible, are committed to climate action and environmental protection, and engage in sustainable business practices. Investors can make an active contribution to climate action by buying shares in an energy company that uses 100% renewable energy. They can also decide to invest in funds that exclude child labor, weapons, oil companies and nuclear power.
Regardless of their preferences for risk, return and liquidity, investors can always opt for a sustainable alternative. There are a number of nonfinancial indicators that can help investors determine whether an investment is sustainable or not. They measure the extent to which investments comply with environmental, social, and governance (ESG) criteria.
| E (Environment) | S (Social) | G (Governance) |
|---|---|---|
| Climate strategy, environmental management, water and energy consumption, CO2, waste etc. | Employees, equal opportunities, health and safety, demographic change, food security etc. | Corporate ethics, board independence, salaries, taxes etc. |
In 2018, the European Commission unveiled an action plan on sustainable finance. As a result, the EU passed important legislation, such as a Green Taxonomy and the Sustainable Finance Disclosures Regulation. The EU-Taxonomy defines criteria that economic activities have to meet to be considered sustainable. The Sustainable Finance Disclosures Regulation requires that financial service providers set out what environmental, social and governance factors they take into account in making investment decisions. More information on these regulations can be found here (in German).
Under the Markets in Financial Instruments Directive (MiFID II), advisers have to ask investors to what extent they want their investments to comply with sustainability criteria. This means that they can decide what factors, if any, should be considered in making investment decisions. In this way, they can have a say in determining the specific activities and companies to invest in.
Beware of greenwashing!
Greenwashing involves making false claims about the “green”, “ecological” or “sustainable” merits of financial products that do not meet basic environmental standards. This means that a product claiming to be “green” or “sustainable” might not be environmentally sustainable at all.
It is therefore important to carefully read the product information to see if it meets ESG criteria. If anything is unclear, it is advisable that you consult an adviser and compare different products. Certificates, such as the Austrian Ecolabel for Sustainable Financial Products (UZ 49), can also provide helpful guidance. See here for more information.
Taxes on saving and investing
Investment income tax is a tax on investment income that covers both dividends and interest as well as capital gains. If your bank or broker is located in Austria, they will withhold the tax and transfer the amount due to the tax office. This means that investors who have all of their savings and investments in Austria do not have to think about when their taxes are due and how much they have to pay.
If, for some reason, no investment income tax is withheld (e.g. because your investment is located abroad), you will have to report that income in your income tax return.
The investment income tax has two different tax rates (as at 2024): Interest on savings and current accounts is taxed at a rate of 25%. All other investment income (e.g. dividends, interest on bonds, capital gains) is subject to a rate of 27.5%.
Taxes on saving and investing
Investment income tax is a tax on investment income that covers both dividends and interest as well as capital gains. If your bank or broker is located in Austria, they will withhold the tax and transfer the amount due to the tax office. This means that investors who have all of their savings and investments in Austria do not have to think about when their taxes are due and how much they have to pay.
If, for some reason, no investment income tax is withheld (e.g. because your investment is located abroad), you will have to report that income in your income tax return.
The investment income tax has two different tax rates (as at 2024): Interest on savings and current accounts is taxed at a rate of 25%. All other investment income (e.g. dividends, interest on bonds, capital gains) is subject to a rate of 27.5%.
Example 1
Julian has a savings account. The bank pays interest on his savings. At the most recent interest payment date, he received EUR 200 in interest. This interest income is subject to a 25% investment income tax.
200 *25/ 100 = EUR 50
The investment income tax is calculated by the bank and transferred directly to the tax office.
Julian gets EUR 150 in net interest income: EUR 200 – EUR 50 = EUR 150
Example 2
Sofia sells her shares and makes a capital gain of EUR 240. She has to pay 27.5% in investment income tax on this gain.
EUR 240 * 27.5 / 100 = EUR 66
This EUR 66 tax is calculated by her bank and transferred directly to the tax office. Sofia’s net capital gain is EUR 174.
An overview of investment options
Investors can choose from a wide range of different types of investment that offer different opportunities and risks. Choosing the right type of investment is crucial to achieving your investment goals. Understanding these different types of investment helps you make informed decisions that are in line with your personal financial goals, risk tolerance and ability to take risk. The following overview shows some types of investment and their typical risk and return profile. Note that all types of investment have their exceptions, i.e. some assets might have characteristics that differ from those described below.
Savings book and savings account
- General description: Investors deposit money in a bank and receive interest in return. The bank can use these funds, among other things, to grant loans at interest rates that are higher than the interest rates on its deposits.
- Risk: Up to EUR 100,000 per person and bank, deposits are considered very safe as they are covered by deposit guarantee schemes.
- Liquidity: In general, depositors can access their money very quickly. However, in the case of term deposits, there are some restrictions. These deposits come with slightly higher interest rates. Depositors who withdraw money before their term deposits mature will have to pay an early withdrawal penalty.
- Return: Returns are quite low. However, interest rates fluctuate in line with the general level of interest rates and can also differ from bank to bank. Normally, interest rates are between just over 0% and 3%.
- Sustainability: Green savings products ensure that savings deposits meet ecological and social standards. Green savings deposits are used to grant sustainable loans, e.g. for renewable energy and green real estate. Green savings deposits can be certified with the Austrian Ecolabel for Sustainable Financial Products (UZ 49).
Further information: Setting and achieving savings goals
Savings book and savings account
- General description: Investors deposit money in a bank and receive interest in return. The bank can use these funds, among other things, to grant loans at interest rates that are higher than the interest rates on its deposits.
- Risk: Up to EUR 100,000 per person and bank, deposits are considered very safe as they are covered by Deposit guarantee schemes.
- Liquidity: In general, depositors can access their money very quickly. However, in the case of term deposits, there are some restrictions. These deposits come with slightly higher interest rates. Depositors who withdraw money before their term deposits mature will have to pay an early withdrawal penalty.
- Return: Returns are quite low. However, interest rates fluctuate in line with the general level of interest rates and can also differ from bank to bank. Normally, interest rates are between just over 0% and 3%.
- Sustainability: Green savings products ensure that savings deposits meet ecological and social standards. Green savings deposits are used to grant sustainable loans, e.g. for renewable energy and green real estate. Green savings deposits can be certified with the Austrian Ecolabel for Sustainable Financial Products (UZ 49).
- Further information: Setting and achieving savings goals
Bonds
- General description: By issuing bonds, companies and governments can borrow large amounts of money from a large number of lenders on the capital market, rather than relying on bank lending only. During the life of a bond, the issuer has to pay interest. At maturity, the principal has to be paid back to the bondholders.
- Risk: A bond’s risk depends on its issuer (who owes the money). If the bonds are issued by governments with a good credit rating, such as Germany or Austria, the risk is very low.
- Liquidity: Bonds can be sold at any time if they are traded on a public exchange. Note that bonds can fall in price, and investors might incur losses when selling their bonds.
- Return: Investors receive interest payments and can derive additional returns from bond price increases.
- Sustainability: Green bonds are bonds that are used to invest in green projects. In addition, there are social bonds that are used to invest specifically in social projects.
- Further information: Securities / Bonds
Gold
- General description: Like other precious metals, gold is a commodity and therefore a physical asset. Gold is a popular and safe type of investment, especially in times of economic or political uncertainty.
- Risk: Gold is considered a safe type of investment. It tends to increase in value in times of crisis, and most Portfolios and funds have some gold allocation as a hedge against inflation. Be careful when storing gold coins at home! Due to the risk of theft and loss, you should always store your gold in a safe or safe deposit box. Be extra careful when buying gold online to avoid investment fraud.
- Liquidity: Gold can be bought and sold anywhere in the world. However, the liquidity of gold depends on the way you buy your gold. You can buy physical gold in the form of coins and bars. In addition, you can buy exchange-traded financial products that can be sold at the current market price within a relatively short period of time.
- Return: Gold is a long-term investment that is mostly used as a store of value and a hedge against inflation. Gold does not yield any income, and it is unlikely to go up in value significantly within short periods of time.
- Sustainability: Gold mining can damage the environment. There are gold mines that are committed to high environmental and social standards, and there are certificates for sustainable gold mining. However, it is difficult for investors to understand how these standards are implemented and complied with.
- Further information: Investment options – real estate, gold etc.
ETFs
- General description: ETFs (exchange-traded funds) buy the components of an index with the aim of tracking the performance of this benchmark index as closely as possible. As ETFs are not actively managed, there are no management fees that the buyer of ETF shares has to pay, which means that they usually have lower costs than actively managed funds.
- Risk: The risk of an ETF is determined by the positions (securities) that it has invested in. A higher proportion of shares means a higher risk and a higher proportion of bonds means a lower risk.
- Liquidity: In principle, you can sell shares in ETFs at any time. However, you might incur losses on quick, ill-considered decisions to sell when the market price of the ETF is below the purchase price.
- Return: Profits can be derived from dividends on shares, interest on bonds, and capital gains. In principle, a higher proportion of shares means higher potential returns. Some ETFs reinvest their income (e.g. from dividends) and do not distribute it to the owners of the ETF shares. This helps to maximize your investment returns and allows you to build wealth faster.
- Sustainability: When selecting a sustainable ETF, the underlying index is of crucial importance. Sustainable indexes include the Dow Jones Sustainability Index, the MSCI World Socially Responsible Index, the Solactive Sustainable World Index and the VÖNIX for the Austrian market.
- More information: Securities – shares, bonds, funds
Investment funds
- General description: Investment funds create a portfolio of various assets. Unlike ETFs, they have active managers that strive to maximize the fund’s performance. In return, they normally charge management fees.
- Risk: The risk is determined by the type of assets that the fund has invested in.
- Liquidity: As with ETFs, you can sell shares in investment funds at any time.
- Return: The return is determined by the performance of the fund’s portfolio managers. Unlike ETFs, investment funds charge active management fees, a cost that needs to be taken into account when calculating returns.
- Sustainability: There are various methods to maximize the sustainability of a fund. To do so, investment funds can use exclusion criteria, sustainability filters and sector comparisons.
- Further information: Securities – shares, bonds, funds
Shares
- General description: By buying shares of stock, you can acquire an ownership interest in a business. As a shareholder, you have the right to attend annual general meetings and exercise voting rights.
- Risk: Buying shares always comes with risk. In the worst case, you could lose all the money you have invested.
- Liquidity: In principle, you can sell shares at any time (during trading hours) if they are traded on a stock market. However, the share price may be lower than the purchase price, in which case you will sell at a loss.
- Return: Shareholders can get profit distributions, i.e. dividends, and make capital gains when selling their shares at a higher price than the purchase price.
- Sustainability: When selecting sustainable stocks, it is important to review the company for compliance with ESG.criteria. To do so, you can use public information such as the company’s website, its climate, environmental and sustainability strategy and its sustainability report.
- Further information: Securities – shares, bonds, funds
Derivates
- General description: Derivatives are complex financial instruments whose price is based on an underlying asset, such as shares and bonds. Trading in derivatives involves speculating on the future price of the underlying assets without acquiring these assets themselves.
- Risk: Derivatives are complex financial instruments with a high level of risk. Depending on the type of derivative, you can lose all the money that you have invested. These financial instruments are not suitable for investors with little experience.
- Liquidity: As with the underlying asset, liquidity depends on the market. The more standardized a product is, the easier it is to find buyers even within short periods of time. However, if a derivative has become worthless due to changes in the price of the underlying asset, it is unlikely that you will be able to sell it.
- Return: Derivatives can generate high returns and can also be used to hedge against changes in the price of the underlying asset. The return on a derivative is determined by the future price of the underlying asset; it is also necessary to have a good strategy.
- Sustainability: Derivatives can be used for sustainable investments. The sustainability of the product is determined by the underlying asset, which can be reviewed according to the ESG criteria.
Further information: Investment options – real estate, gold etc.
Crypto-Assets
- General description: Crypto assets are digital assets. They can be used as a means of payment or for investment purposes.
- Risk: The safety and security of crypto assets is determined by the type of asset and the technology used. In principle, these are high-risk financial instruments that are not covered by Deposit guarantee schemes. For this reason, investing in crypto assets is only suitable for experienced investors.
- Liquidity: Liquidity is determined by the type of crypto assets and by the platform on which they are traded. With lesser-known crypto assets, there is a risk no buyer will be available quickly, and that the assets cannot be sold.
- Return: Crypto assets are highly volatile. You can generate high returns but also lose your entire investment.
- Sustainability: Crypto mining, i.e. the generation of new crypto units, has frequently come under criticism for its high energy use. Although some crypto assets are based on energy-efficient technologies, this asset class cannot be considered to be sustainable.
- Further information: Investment options – real estate, gold etc.
A brief recap
How is saving different from investing?
Saving and investing are two different approaches to making use of money that you do not spend. Saving means putting money aside for use at a later date. In many cases, this involves low-risk assets such as savings accounts and savings books. The main goal of saving is to preserve capital and build a reserve to meet future needs. Investing, by contrast, means putting money into assets such as shares, bonds and real estate with the aim of achieving long-term returns. In general, investing involves higher risks, but it also offers the potential for higher returns than traditional saving.
What are some tradeoffs regarding investing?
The main tradeoffs in investing can be shown as a triangle that is easy for investors to visualize. There are tradeoffs to be made between three crucial factors: risk, return and liquidity. Based on their individual needs and risk appetite, investors need to strike a balance between these three factors.
What types of investments exist?
There is a wide range of different investments, including savings accounts, shares, bonds, real estate, commodities and investment funds. Each type of investment has its own characteristics, opportunities and risks.
How can I consider sustainability and ethics when I make investment decisions?
You can consider sustainability and ethics by respecting environmental, social and governance (ESG) criteria when you make your investment decisions. This may involve selecting companies that are committed to the environment, social justice and good corporate governance, and excluding companies that operate in controversial industries or violate certain ESG standards.
What taxes do I need to consider when saving and investing?
Investment income tax is a tax on investment income that covers both dividends and interest as well as capital gains. If your bank or broker is located in Austria, they will withhold the tax and transfer the amount due to the tax office. This means that as long as you have all your savings and investments in Austria, you do not need to worry about how much you have to pay in tax and when.
