Save or invest? No, save and invest. Why choose? Because in the end, these 2 actions are linked and feed each other. A little guide to make your savings grow and finance your projects.
Save or invest? No, save and invest. The virtuous circle that will make you happy.
Save or invest? Or save and invest?
Do you have to make a choice or do you have to combine the two?
In a way, it’s impossible to invest without saving. In the other, it is possible to save without investing. But is that wise?
A look back at the differences between “investing” and “saving”, and a short presentation of the different tools that come with them.
Why save? Why invest?
What does it mean to save?
Saving means keeping a part of your income that will not be spent. The amount of savings is obtained by subtracting consumption from income.
In order to have funds available for savings, a budget surplus must be generated. There are two ways to do this:
- increase your income
- reduce your expenses
The 2 options are of course not exclusive: you can do both. It is even recommended. But it will always be faster to reduce your expenses.
Saving is different from saving. Saving means optimizing your spending, i.e. organizing your expenses to keep as much savings as possible at the end.
What’s the point of saving?
Saving allows you to build up capital that can be used for a variety of expenses:
- Used for current expenses, savings are used to pay for a vacation, a new car, etc.
- It creates a fund that will only be touched in the event of unforeseen circumstances.
- It will be used to finance an investment.
Saving thus makes it possible to secure your present (points 1 and 2) but also to prepare your future (point 3).
Dosing the savings
It is wise to save a minimum to always have a pear for thirst. Saving is the safest way to have money available.
However, don’t fall into the opposite excess and fall into hoarding, which pushes you to amass money over and over again, whether it’s simply to keep it or even to invest.
Of course, if you invest this money, you are preparing your future. But what about your present? Yes, you secure it. But you’re not really living it anymore.
Falling into an obsessive savings obsession inevitably turns into a bad life experience and bad wealth management.
What does it mean to invest?
Investing means investing money with the aim of earning income in the more or less near future. The money you invest is reinvested in an economic activity that will provide you with income or capital gain.
What is the purpose of investing?
Investing allows two things:
- Buying assets that generate income: real estate, dividends…
- Secure your future by achieving financial independence, prepare for retirement and the future of your children.
The notion of risk in investment
Unlike savings, investment has varying degrees of security. Or risk.
To caricature, a safe investment yields little return. On the other hand, a risky investment can yield a much higher return. But you can also lose, or even lose everything. That’s normal because it’s riskier.
The objective is to find the right compromise between return and risk.
If we summarize…
- Saving money means thinking ahead and acting according to circumstances. It’s about spending wisely and jumping on good deals.
- Saving is about establishing a routine that makes you feel good about your daily life and generating a regular budget surplus. Instead of squandering the savings, you keep them.
- Investing means committing to a longer-term process with a view to reaping benefits in the future. The money saved is used to build for the future.
It is clear that “save”, “save” and “invest” do not have the same meaning.
However, in the overall process of managing your finances, wealth and financial independence, all three terms are equally important. And it’s obvious that you need to save and invest. Specifically, you need to save and then invest.
Moreover, when you think about it, saving and investing feed off each other.
- Saving creates the first capital to invest.
- Investing allows you to increase your income and therefore your savings.
- This additional savings can then be invested.
- And so on and so forth …
A real virtuous circle that is just waiting to be started. All the more so if you take advantage of the power of compound interest.
A little guide: how to save, how to invest?
How to save: usable media
The savings account is also known as a deposit account, savings book or savings deposit.
The passbooks offered by the banks give you the possibility to put aside your savings, i.e. the sums that you do not need immediately.
The money deposited is easily available there. The medium generates an interest income which consists of a base rate, an increase premium and/or a fidelity premium.
You will find that these passbooks do not offer very high returns. But that’s not a problem, even if we would have taken higher rates. Indeed, these passbooks are not intended to be investment vehicles. They should only hold your savings for a maximum of 2 to 3 years. Beyond that, turn to more remunerative supports.
You can choose among the following passbooks according to the use to which you intend to put your savings but also the amount and the ceilings of the various passbooks.
Offered by all banking institutions, a natural person can only own one.
Its funds are available and it is capped at £22950 per person or £76500 for an association.
Its interest rate is fixed, currently 0.75% per year.
The Youth Booklet
Limited to one per person whose tax residence is located in France, it is reserved for 12-25 year olds.
The ceiling is £1600, but withdrawals are subject to authorization under the age of 16.
Its interest rate is fixed, currently 0.75% per year.
The Compte Epargne Logement, the CEL
The CEL provides access to home loans at preferred rates.
Subject to social security deductions, it must not be combined with another CEL at another bank, nor a PEL.
It is capped at £15,300.
Its rate is currently 0.50% per year plus a state premium.
The Housing Savings Plan, the PEL
The PEL makes it possible to obtain a home loan at a preferential rate.
It must not be combined with another PEL at another bank, nor a CEL (unless it is taken out at the same bank).
Its interest rate varies from 1 to 2.5%.
Its ceiling is £61200. However, if the withdrawal is made within the first two years, the interest is revised downwards to the CEL rate.
Beyond the twelfth year, blocked savings are subject to social security contributions and income tax.
Limited to one passbook per person, the LDDS only concerns adults whose tax residence is in France.
It is capped at £12,000.
Like the Booklet A, its interest rate is fixed, currently £0.75 per year.
The Popular Retirement Savings Plan, the PERP
This locked-in account allows for a supplemental income at retirement age.
Theoretically unavailable, the funds can be withdrawn in certain exceptional cases.
The term account
Without a cap, the funds are unavailable before the term. If the funds are released, the interest disappears.
It is the bank that sets its rate, which can be fixed, progressive or variable.
The term account is subject to income tax and social security contributions.
The bank savings account or passbook
With no cap, his funds are available.
The rates are at the discretion of the bank, from 0.2 to 1.5% for ordinary passbooks and up to 4% for super-booklets with a limited period.
They are subject to income tax and social security contributions.
How to invest: usable media
There are many ways to invest.
You can for example create your own company, go into crowdlending or make real estate investments.
But I will keep it simple and present you two means that seem simpler and more classic: the stock savings plan (PEA) and the ordinary share account (CTO).
These two supports depend on the stock market. The CTO provides regular income from dividends distributed by the shares or capital gains. The sums invested do not have to be blocked.
The PEA allows you to build up capital by managing a portfolio. The funds are converted into a tax-free life annuity or capital.
The funds are available with the CTO which is linked to a current account. The amount of the investment is unlimited and the Deferred Settlement Service (DSS) allows overdrafting, which is not possible with the AEP.
The amounts in the PEA must be locked in for five years to saturate the tax benefits attached to the PEA. The investment amount is limited to £150,000 for the classic PEA.
The diversity of investments
The CTO offers all financial securities (shares, bonds, SICAV, FCP…) worldwide. Its level of liquidity knows no limit.
The PEA is more restrictive. The securities must be issued by companies domiciled in the European Union or in a State of the European Economic Area (EEA).
Even after the tax reform of January 2018, the PEA is still by far the most attractive from a tax point of view.
For your savings, keep it simple.
- Favour the Booklet A and the by combining their ceilings.
- If you’re thinking of buying a property, you can turn to CELs (Compte Epargne Logement) and other PELs (Plan Epargne Logement).
- If you have a child, you can open a Booklet Jeune for him to manage his few savings. But don’t forget that he is also entitled to the Booklet A and the LDDS. And as soon as they are very young, open a life insurance policy for them!
You already have enough to do the essentials.
For your investment, the solutions are varied, with their own characteristics. Here’s what I suggest you do first.
- Life insurance, PEA and real estate are the first 3 pillars to consider.
- The Ordinary Securities Account (OSA) will complement them if you feel tight with your life insurance and PEA.
- If you feel like an entrepreneur, you can create your own business. This can be very rewarding, and not only from a financial point of view. However, it will require a large investment of time.
Saving or investing?
Even if these two actions are quite distinct, the means implemented and the deadlines being quite different, they appear to be extremely linked. In an ideal configuration, one should not invest or save, but rather save and invest.