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Difference Between Saving and Investment

  • Akshatha Sajumon
  • 20 Feb
  • 6 minutes

If there is one common goal in all our lives, it is to be financially secure for our future. We all strive towards attaining financial security to meet various goals like buying a home, touring the world, securing the future of our children, retirement, etc. In our journey towards a financially secure future, we often focus on two main aspects, saving and investing. But have you ever pondered over these two concepts and discovered their true meaning while learning about their differences? 

Let’s explore these two terms and understand how they are different, such that it can help in improving financial planning for the future.

Demystifying the concepts of saving and investing

Saving and investing are often used interchangeably because of the assumption that they almost mean the same thing. However, this understanding is far from reality. Saving essentially means setting aside some of your earnings to meet expenses that are mostly linked to certain goals. Investing, on the other hand, is allocating some of your earnings into avenues that will help the funds grow, either in terms of capital growth or wealth creation or both.

Thus, saving is not the same as investing. While they may lead to the same end goal of wealth creation, they are two different paths of achieving wealth. 

Why is saving and investing important?

From the explanation given above, you can deduce that there is one common aspect between saving and investing. That is, creating a corpus to help you achieve your goals. Savings allow you to set aside a certain portion of your earnings for emergency needs or covering for uncertain situations. Investing lets you secure your future, especially from a long-term perspective. Various financial avenues allow you to invest as per your risk and return expectations along with your investment time horizon.

Both aspects are important since they let you focus on wealth creation such that you are financially secure in the future. We save for our future and we invest for a better financial state in the future for ourselves and our families.

 

How is saving different from investing?

Let us now deep dive into the differentiating factors of saving and investing:

Time horizon

If you wish to go on a vacation with your family this year, the first thing you may do is start saving. The purpose may be different each time, but one thing that remains common for financially covering most short-term objectives is saving. Investing is usually done for long-term goals such as a child’s education, retirement, etc. Since investment is mostly for longer-term goals, it requires advance planning. If you start investing now, you may have accumulated enough to suffice for your selected long-term goal. Thus, saving and investing are different since they cater to different timelines.

Locking of funds

Savings let you access the available funds by simply withdrawing or spending the money as you like. Whether you withdraw a portion of the entire savings is up to you and your needs. There is no restriction on how much and how you access your funds since these are your funds. Investments, however, may restrict the liquidity and it depends on the kind of investment you have made. Some investments may even result in tax or penalty on early withdrawal or withdrawal during a lock-in period. This restricts your access to the funds.

Degree of risk

Saving money in your bank account is far safer than keeping it at home. With investments, one can lose the funds due to risk exposure, depending on the investment type and risk element involved. If investing in equity mutual funds, for instance, the funds are exposed to market movements and may result in losses if the fund has an inherent risk involved. Thus, while investing in any scheme, you must consult a financial advisor or make decisions yourself after careful consideration to contain the degree of risk. This is not needed while saving your money. 

Earnings

Most of us save money by keeping the funds in a bank savings account. This means very low-interest earnings. With investments, you can have a choice of gaining higher returns depending on the scheme or investment avenue. For instance, equity mutual funds can fetch returns of 8-10% or higher depending on historical performance, fund manager’s expertise, fund objective, and other factors. 

Should you save or invest?

The question still remains, should I save or go for investment? 

Saving and investing are two different aspects, although they are interlinked. Savings cater to your present needs and investments are meant for the future. If you want to invest, you must first begin saving to gather enough funds for investment. Your earnings from an investment should ideally be saved for achieving specific goals. Thus, begin with savings and proceed towards investments such that you can attain sufficient capital gains in the long run. Adopt a habit of savings to make the most of various investment options.

Conclusion

Wisely saving money today will benefit you tomorrow. Adopt this mantra in your life to ensure that your short-term goals or financial emergencies are always covered. For the long run, however, focus on investing, as it can adapt to your changing needs, even if your current income is limited. Savings may not be enough for larger financial goals. Therefore, to plan for your future, you must start investing at the earliest.

FAQs

  1. How much of my savings should I invest?
    It is ideal to put aside at least 10-15% of your savings towards investments.
  1. What is a good amount to save?
    Most experts suggest saving about 20% of your monthly salary. As per the 50/30/20 rule, it is best to reserve 50% of your earnings for essential expenditure like rent and food. 30% should be reserved for discretionary expenses and 20% for savings.
  1. How much savings should I have at 30?
    It is recommended to have saved about 50% of your yearly income by the time you turn 30. This will help you in taking some risks with regards to investment exposure and also cover your high spending needs while you are young. The savings also depend on other things like your liabilities like repayment of education loan, support to your parents, siblings, etc.
  1. How should I invest?
    There are various avenues of investment available today. Some of the most preferred ones include mutual funds, PPF, stocks, NPS, Bank FDs, etc.
  1. How can I invest in mutual funds?
    To invest in mutual funds, you can begin by exploring some of the top rated funds on the Fisdom app. This app is easily available to download on your smartphone and provides access to numerous funds, depending on your risk/return appetite.
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Akshatha Sajumon

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