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Do You Know the Difference Between Savings and Investment?

Do You Know the Difference Between Savings and Investment?
  • 6th Jul 2022 |
  • 3,373

We often hear people talking about savings and investments, their benefits, and how much funds should we put into these. For example, some say they plan to go on a vacation soon with the amount they have “saved”, while some talk about their money making more money for them, which they “invested” somewhere.

Though we frequently use these terms in our day-to-day lives, most of us fail to comprehend the exact difference between them. So, let us talk about savings and investment, what they are, and understand savings vs investments.

What is Savings?

There are primarily three ways to earn money for a livelihood: being employed, self-employed, or running a business. But none of these sources can guarantee to provide uninterrupted income forever, which is the primary purpose of savings. Nevertheless, with a well-thought-of saving strategy, you can make your future financially secure by saving in a disciplined manner.

When earning money, financial experts advise taking out a certain percentage of that amount and keeping it safe aside, which is called savings. This amount can be called your emergency fund. The emergency fund is the essential corpus of money that provides you with a financial buffer during an emergency. Generally, financial advisors suggest taking out 10-20% of your income as your savings and not touching it unless you are stuck in a dire emergency.

The fund in savings should be sufficient to run your expenses for at least three months. However, keeping enough savings to meet 12 months of expenses is recommended.

What is Investment?

Investment is putting your money into an asset to gain good returns on that money, ultimately adding to your wealth. Numerous investment tools are available in the financial market, such as Stocks, Bonds, Fixed Deposits, Mutual Funds, Exchange-Traded Funds (ETFs), etc.

American Businessman and the author of many successful business books, Robert T Kiyosaki, says, “Often, the more money you make, the more money you spend; that’s why more money doesn’t make you rich – assets make you rich.”

The main objective of investing is to put your money to work and fulfil your short-term and long-term financial goals. In earlier times, investing needed a large amount of money to start with, such as real estate or gold, but nowadays, many new investment plans have come up where one can begin to invest with a mere amount in the hundreds.

Before starting to invest, one must consult a financial advisor to help them decide where and how much to invest. In addition, you must consider the vital factors before choosing the right investment tool, such as your budget, financial goals, risk-taking appetite, income tax aspect, etc.

Saving vs Investing: Key Differences

The Risk Factor

The saving products usually involve low risk, unlike the investment tools. This is because the returns of investments depend entirely on the market. Unfortunately, the capital market is volatile and directly impacts your funds.

Goals and Returns

Saving products such as Savings Accounts, Recurring Deposits, Tax-Saving Fixed Deposits, etc., secure your money and provide nominal returns in the form of interest. However, the opportunities to grow and increase the value of your savings are limited here. On the other hand, research-backed investing can earn much higher returns beating inflation and accumulating wealth for you.

Time Period

If you are planning to buy an expensive gadget or go on a vacation trip, you can meet these goals within 1-3 years of the period. A savings plan can help you fulfil such short-term financial goals. Conversely, if you want to meet your long-term financial goals, which might take more than five years to be accomplished, investing is the right fit for you.

Protection Against Inflation

Since we all know that returns in the savings plan are only in the form of interest, it is not sufficient to beat inflation. However, financial experts believe wisely investing is the best way to combat rising inflationary rates.

Savings and investments help you save money and meet your future goals. Both have risk factors, periods, returns, investments and advantages. When it comes to financial planning, it is vital to understand the differences between the two and make the right decision.

Savings provide financial security for an unexpected event, while investing can offer a high return and secure your life even when your primary income is insufficient to meet your needs, considering the inflation rates. As they say, the right time to invest is right now. So start investing today to secure your tomorrow!

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