Savings Vs Investment: Key Differences You Should Know

Posted On: 04-August-2021


“Someone is sitting in the shade of a tree today because someone else planted it a long time ago.”

As quoted rightly so by Warren Buffet, what you save or invest today will secure the future of you as well as your children. Finances are necessary, more importantly, financial attitude/behavior determines your future. The more you save/invest, the more secure your future will be. While the two terms are used interchangeably, there is a notable difference between savings and investment. In this article, we will be discussing both the concepts and by the end of it, you will be able to decide whether to invest or save.

What is Saving?

Saving is the process where you put aside a certain amount of money from your monthly earnings and keep it secure for a rainy day. They are typically small amounts that you keep aside for smaller periods of time, 1 to 3 years. The main objectives for saving could be simple like buying a mobile phone or going on a short weekend trip. Saving is a good option for such short-term objectives.

What is the importance of saving money?

Saving money is a stepping stone to financial security. Ideally one should save 10% of their income every month. This will help you achieve short-term goals depending on your needs. If the money you saved is not spent, then you can think about investing it for a longer-term. Defining your goals will be motivating for you to save smaller fractions of amounts. It gives you financial discipline which could be helpful in planning the distant future.

As your savings improve, your financial worries should diminish and you would be worry-free. It is inevitable that in life there are emergencies. Saving money in smaller amounts could come to your rescue on a rainy day. Also, life is full of events, you could be saving for a small birthday celebration or a lavish wedding, you could be saving to buy a home or just to pay the month’s rent. In any which way, saving money helps you maintain a secure life with no worries and just happiness.

What are the best ways to save money?

There are many instruments to save your money. Right from a piggy bank to a savings account, there are formal as well as informal ways to save money. There are different types of savings too: Savings account, Recurring Deposit or Fixed Deposit. One misconception about saving is that it doesn't grow as quickly as investing does, but this isn't true because the amount of money saved grows, though slowly.

It is easy to open a savings bank account, some banks even allow you to do it online. Instead of informal savings plans, a savings account is the most secure way to park your money. You can earn interest, though minimal, for saving your money with the bank. The banking staff will always be there to support you in case of queries or issues.

The more money you save, the lower the financial risk you have. Saving money is the first stone to becoming wealthy. It is a habit that you can cultivate like everything else. There is the danger of missing a valuable financial opportunity if you haven’t saved any money for the near future.

What is investing?

Investing is the process where you spend the money you saved to secure larger and long-term financial goals. Investing money in assets can help fund bigger purchases, spending on education, wedding expenses, etc. This will help you avoid debt, reduce financial stress, leave a financial legacy, and will also provide a greater sense of financial freedom.

If you’re planning for the distant future say, 5 years or more from now, investing money now can make the goals like your child’s education, wedding, or retirement more achievable by then.

What is the importance of investing?

Investing money gives you peace of mind, expands your options for decisions, your quality of life. Most people who enjoy greater financial freedom at a later point in life are the ones who made smart investment decisions. You can become one of those people, too.

It's Never Too Early to Start Investing Money- Even if you don't have much money at your disposal, you should start investing what you can afford today and invest more as time goes on. Investment means you are investing money into something that will make more money than it cost you while saving means you are just saving money for later on or for a rainy day.

What are the best ways to invest?

There are a few things that need to be done before investing money.

●     List out your financial goals

●     Determine how much you can save each month

●     Define different investment plans for each goal

There are multiple investment options in the market. We are listing out a few here, though each one calls for a separate article. A small brief for you to understand what is what:

1.    Direct Equity: These instruments are also called stocks. The investment in stocks is not everyone’s cup of tea. It depends on their risk appetite.

2.    Mutual Funds: These are actively or passively managed equity funds. They also involve investing in stocks with a much lesser risk associated.

3.    Real Estate: It involves the buying of residential or commercial properties or plots of land. Unlike the other assets, real estate is highly illiquid. Real estate investments involve lesser risks, but higher maintenance costs.

4.    Gold: This is the most sentimental investment for us Indians. Buying gold is not just of sentimental value but also the most preferred mode of investment.

5.    There are many other millennial ways of investments like SIPs, REITs, Sovereign Gold Bonds, RBIs Taxable Bonds, Certificates of Deposits, etc. However, these have not been quite explored in terms of risk and safety. But investing in small amounts could be beneficial in the long term.

5 Key differences between Savings and Investing:

Now that we’ve understood what each term means, let us understand the differences between savings and investing.

1.    Time Period

As said earlier, savings serve short-term goals like a weekend vacation or a new mobile phone. They can typically be planned for a time between 1 to 3 years.

Investments are long-term and include larger financial goals. Money can be invested for a minimum of 5 years and more.

2.    Access to Money

At the time of need, savings can be immediately liquidated while investments may take longer. You may choose to withdraw a small amount or spend all of your savings depending on your need. But the easier the access to money, the easier it is to spend.

3.    Risk

The risk of losing money in savings is less compared to investments. Investing in the highly volatile stock market or unauthorized investment avenues can put your money at risk.

4.    Returns

Interest on savings accounts is relatively less compared to investments. Investments in equity-based mutual funds provide higher rates of interest as opposed to the 8-9% offered by savings bank accounts.

5.    Choice

The right thing is to identify your purpose first. Whether you want to save or invest? Whether your plan is short-term or long-term? Whether you are willing to take risks? Do you want higher returns? or do you just want to save enough for the near future?

Savings and Investments are mutually connected. While allocating your money to savings and investments, here are a few things you should keep in mind.

1.    Financial Goals

List all your financial goals and allocate a timeline to each of them. Then plan your investments for long-term and savings for short-term.

2.    Risk appetite

Depending on how much risk you are willing to take, there are different investment options in the market today.

3.    Additional Benefits

Some investment options provide you with certain tax deductions, the returns you earn might also be tax-free. Look at various avenues before choosing an investment tool.

4.    Diversify your Portfolio

You must balance your investments by diversifying your portfolio by investing in different debt and equity instruments. This way you can safeguard your investments from market risks.

Your savings and investments play different roles in your financial planning. So, we cannot say which is more important. Your savings and investments should work together. Some people may opt to build their savings before they invest. It is a completely personal choice and one’s financial aptitude. Financial security can have various purposes from buying a house, child’s education, marriage, a world tour, or a post-retirement plan. What are you doing to secure yourself financially? Are you saving or Are you investing