Savings and investments are two words which have been used synonymously over the years. With people referring to their investments as their life savings, the fundamental difference between the two words and essentially two concepts has diminished. Yet, there is no denying the fact that the two are different sides of a coin called money. In this article, I aim to explain the key differences between the two that you must know, and the role each one plays in your financial planning. Read on!
What Is Saving?
Savings can be referred to a part of total income which is left at hand after paying off all the bills and covering all expenses. The essential meaning of saving money refers to the act of keeping aside a certain amount of money which is left after the family or individual expenses are covered and is meant to be used in times of need or emergency. Savings can be done casually or aimed towards a goal like saving for a smartphone or a vacation.
What Is Investing?
Investing refers to the process of putting your money in investment avenues and financial products which allow your money to grow and help you create wealth. The idea with investing is to save money and earn profits on it.
Comparing Saving And Investing
|DEFINITION||The exercise which involves investing the saved money so as to generate profits and capital appreciation||The income or money left at hand after all expenses are met|
|PURPOSE||Capital appreciation and wealth creation||Meet short-term or unplanned needs and requirements|
|RETURNS||High||Very less or Nil|
|RISK||Moderate to high||Negligible|
|LIQUIDITY||Optional in some variants||High|
Key Differences Between Saving And Investing
Savings: Of the so many differences in saving and investing, the essential differentiator is the purpose of doing them both. Savings are done so as to provide with an emergency fund or go-to fund to the family as and when required. Saved money is income at disposal set aside for future use. This money is highly liquid and can be used in any situation like a medical emergency or funding a party or school fee or buying a phone etc.
Saving money is simple. All you need to do is pay off all your bills for the month from your income and whatever remains unconsumed form the income is your saving. You can either keep it as cash or deposit in a savings account or pension fund or credit certificate etc.
While savings lay the foundation for a strong investment portfolio, it does not help create wealth on its own. Saved money does not grow itself, it is like stagnant water which will deplete gradually with increasing inflation.
Investing: Investing is an acquired taste like Wasabi. Nobody likes their saved money going somewhere but everyone later enjoys the flavors it gives. Investing is a step further to savings. once you have saved some money and have it at hand for disposal, you can start investing it in avenues which fall in alignment with your financial goals. For instant reward seekers, investing may hurt a little as money will be gone for immediate use but if you are a patient investor, you will reap greater benefits at the time of maturity.
Investing is your alpha tool which fights increasing inflation and helps you create wealth. There are a lot of forms which can be categorized under-investing like real estate, mutual funds, bonds, direct equity, stocks and various other securities floating in the market.
Before you invest your money, you must align your financial goals with your investment instruments and choose carefully.
Saving: The next big factor which is a major concern for a lot of investors is a risk. Risk is the limiting factors due to which people generally refrain from investing their money and choose to keep it ‘safe’ in a savings account.
When you deposit your money in a savings account or certificate of deposit, you are exposing your money to minimize risk in the market but do not get any or much return on your money. All you have at hand is more or less the principal amount you had saved initially at the time of withdrawal as the returns you gain on that money gets adjusted for high inflation
Investing: Investing, on the other hand, allows you to earn greater returns with some exposure to risk and volatility of the market. Investing can be risky but is highly rewarding. There are a lot of measures you can adopt to mitigate and manage risk in your portfolio. First being, selecting the funds according to your risk profile.
Savings: Savings do not account for any considerable amount of return on the principal amount. Since there is little or negligible risk involved with the money, there is very less return. Capital preservation is the idea behind savings which generally does not account for appreciation of the money.
Investing: Rewards serve as the Ace of Spades for people who bank on their investments. The biggest advantage of investing is the high returns they provide with some exposure to market volatility. If you are a risk-averse investor or have a little risk appetite, you can choose funds which are rewarding and low on risk like debt funds. keeping your financial goals in alignment with your investments is very important and would help you in selecting funds which fall in place with all your requirements.
Savings: Liquidity refers to the ease with which you are able to encash your money saved or invested at different avenues. Savings are highly liquid funds as they are simply the money which is not used. Be it a savings account or certificate of deposit, savings can be encashed anytime providing high liquidity.
Investing: Traditionally investing used to come with certain lock-in period questioning the liquidity factor. Nowadays keeping in mind the money requirement of investors, there have been several ways introduced to cater to liquidity needs. You can invest through SIP method and opt for SWP and STP which is a Systematic Withdrawal Plan and Systematic Transfer Plan which allows you to transfer back the money you linked savings account for further use.
There are also a lot of liquid mutual funds in the market which provides near-instant liquidity to investors hence resolving liquidity needs.
Which Way To Go?
Saving and investing are essentially two different concepts which need to be worked upon together to create wealth; none can stand alone in this inflating market. Investing is a must if you want to create wealth and keep up with the ever-rising demands. The sooner you start the better it is as over the long term your investments get compounded and the power of compounding works wonders to build your wealth empire. Aligning your financial goals with your investments will ensure a steady and covered future with saved corpus waiting to be explored further.
Disclaimer: The views expressed here are of the author and do not reflect those of Groww.