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Two words, savings and investments, are often used interchangeably. As investment is often referred to as life savings, and vice versa, the fundamental difference between the two words has diminished. Let’s see how they differ fundamentally.
Two words, savings and investments, are often used interchangeably. As investment is often referred to as life savings, and vice versa, the fundamental difference between the two words has diminished. Yet these two remain different with different flavours to each. Let’s see how they differ fundamentally.
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Savings refer to the amount left with you after you have met all your expenses, including monthly bills. The idea of saving money refers to the practice of setting aside a certain amount of money after expenses are covered. This is meant to be used in times of need or emergency. Savings are done casually or can be considered as a passive activity, usually aimed at meeting recurring expenses.
Investing is the act of putting your money on various investment instruments and financial avenues. The main goal of investment is to make your money to grow and help you create wealth. Investing helps you earn profits on your money. Investing requires you to be actively involved with growth of your money and frequently reviewing your wealth creation strategy.
|DEFINITION||An exercise that involves investing saved money so as to generate profits and/or capital appreciation||The income or money leftover after all expenses are covered.|
|PURPOSE||Capital appreciation and wealth creation||Fulfill short-term or unplanned needs|
|RETURNS||High||Very less or none|
|RISK||Moderate to high||Negligible|
|LIQUIDITY||Optional in some variants||High|
Savings: Among the many differences between saving and investing, the essential differentiation is the purpose. Savings are done so it may act as an emergency or go-to fund as and when required. Saved money is income set aside for future use. This money is at your disposal and can be used in any situation should the need arise.
Saving money is easy. Pay all your bills for a month from your income and whatever remains unconsumed becomes your savings. It can be kept as cash or deposited in a savings account or in the pension fund, etc.
While savings lay the foundation for financial discipline, it does not help create wealth. Savings lie idle like stagnant water which will get depleted eventually as inflation increases.
People often feel sceptical about investing. Not having their savings readily available at hand can make some people anxious. So, the idea of investing it somewhere was not popular until people saw the benefits.
Investing is a step ahead from savings. If you have a sum of money saved, you can invest it in different investment avenues to get more returns from it. This means that your money keeps drawing you extra income without any active effort.
Investing is your best tool to fight rising inflation, which also helps you create wealth. There are different financial products that can be categorised as investment. For example, real estate, mutual funds, bonds, direct equity, stocks and various other securities available in the market.
Before you invest your money, you must be careful to make sure that the choice of your investment matches your financial goals.
Savings: Another factor that impacts investors is risk. Risk is the chief reason why people generally refrain from investing money and choose to keep it safely tucked away in a savings account.
It is true that the savings deposit has minimal risk involved among all financial instruments. While that is the case, you do not get much returns from it either. All you may have at the time of withdrawal is more or less the principal amount you initially deposited.
Investing: On the other hand, investing allows you to earn better returns with some amount of risk and volatility. Investing can be risky but is also equally rewarding. There are several measures you can adopt to mitigate or manage risk in your portfolio. First and foremost, by selecting funds according to your risk profile and time horizon, you can become a smart investor.
Savings: Savings do not add considerable gains on the principal amount. Capital preservation is the purpose behind savings which does not aim at appreciation of the money. However there is no risk, there is no returns either.
Investing: Remember when it comes to investing, the higher the risk, the better the returns. The biggest advantage of investing is the high returns it gives. If you are risk-averse as an investor, or have a low risk appetite, you may choose funds that are low risk, like debt funds, and are rewarding at the same time.
Savings: Liquidity refers to the ease with which you are able to cash in on your money saved or invested at different avenues or change hands on the shares you have bought. Savings is highly liquid as it is simply money that is not used. Be it savings account or certificate of deposit, savings can be encashed anytime without any trouble.
Investing: Until recently, investments used to come with lock-in period. These days, however, the liquidity factor has been upped by bounds. You may opt to invest through SIP method, or SWP and STP which are Systematic Withdrawal Plan and Systematic Transfer Plan respectively. These facilities allow you to transfer the money back to your linked savings account for your use.
There are also plenty of liquid mutual funds in the market which provide almost instant redemption to investors, hence resolving the problem of liquidity.
Which way to go?
Saving and investing are two different practices which need to work together to create wealth. Neither can stand alone in this inflating market. Investing is a necessity to creat wealth and to keep up with the ever-rising demands of the market.
When it comes to investing, it is the sooner the better, as over time your investments get compounded. Compounding works in your favour and helps you build your wealth. Aligning your financial goals with your investment choices will give you a stable and secure future with a financial corpus waiting to be explored.
Harsh Jain is Co-founder and COO of Groww.
First Published: Oct 11, 2019 6:00 AM IST