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Do You Know the Difference Between Savings and Investment?

Most individuals, especially novice investors, equate saving and investing when they are completely different objects with very different functions and positions in your financial plan and balance sheet.

  • Apr 24, 2023
  • 4,508 Views

Saving and investing are two crucial financial concepts that often get confusing. While investing plans in the financial market has both benefits and drawbacks, one must face the risk of investing money in various ways to protect their future.

    Key takeaways

  • When earning money, financial experts advise taking out a certain percentage of that amount and keeping it safe aside, which is called savings.
  • Banks offer a variety of savings account types to meet the needs of their clients.
  • Investment is putting your money into an asset to gain good returns on that money, ultimately adding to your wealth.
  • Investment has become an essential aspect of financial planning, and it offers numerous benefits to individuals.

We often hear people talking about savings and investments, their benefits, and how much funds we should 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 the basic differences between them.

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 saving plan 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.

Advantages and Disadvantages of Savings

Praise yourself first if you are fortunate enough to have spare cash for long-term objectives! Saving is crucial, but it may be quite difficult for most individuals. Because savings accounts offer relatively low long-term interest rates compared to other long-term investments, many individuals disregard them. Understand their benefits and drawbacks before making a decision.

Advantages of Savings

Whether you are just starting out on your financial journey or have been managing your money for a while, saving has numerous advantages that can help you achieve your long-term financial goals. From building an emergency fund to achieving financial freedom, saving money is an essential tool that can provide you with financial stability, security, and freedom. In this era of economic uncertainty, knowing the advantages of saving can give you a competitive edge and help you make informed financial decisions.

Earn Interest

Banks now offer better interest rates and numerous other perks, including lower rent for lockers, unlimited ATM withdrawals, and more, to entice new customers. Additionally, some banks offer a variety of savings account types to meet the needs of their clients.

Safest Investment Option

A savings account does not invest your money, unlike most other investing options. Nevertheless, one of its key benefits is that it provides modest returns. All you need to do to use this feature is put money into your savings account.

Minimum Investment Amount

By comparing the various options, you can see that a savings account is also the most affordable investment alternative. To continue collecting interest, ensure your account has the required minimum balance.

Disadvantages of Savings

Saving money is a fundamental financial habit that is often encouraged and praised for its benefits. From building an emergency fund to achieving long-term financial goals, there is no denying the importance of saving. However, while saving is generally considered a positive financial behaviour, there are also some potential downsides to this habit that are often overlooked.

Interest Rates Can Change

The changeable interest rates that the bank offers are a significant drawback of a savings bank account. This implies that the bank can alter the interest rate. Even though the majority of the changes are minor, it is possible that the interest rate on a savings account will decrease in six months.

Easy Access

Even though having easy access to money is one of a savings account’s most beneficial features, some people might perceive it as a disadvantage. Because you can always access your money with these accounts, people are more inclined to spend.

Minimum Balance Requirement

To start a savings account, you must maintain a minimum average balance. You will be assessed a fee by the bank if you do not maintain this balance. To avoid fees, make sure to check the minimum balance requirements of the bank before opening an account and maintain this balance at all times.

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 is why more money does not make you rich – assets make you rich.”

The main objective of investing is to put your money to work and fulfill 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 vital factors before choosing the right investment tool, such as your budget, financial goals, risk-taking appetite, income tax aspect, etc.

Advantages and Disadvantages of Investment

Investing are buying stocks and other assets and holding them for the long term. A long-term investment horizon often uses a passive investment strategy​, meaning there is little active buying and selling (trading) happening. However, some investors may choose to enter and exit positions every few years or when their investing strategies​ tell them to do so.

In either case, here are some advantages and disadvantages of investing.

Advantages Of Investment

Investment can be defined as the act of committing money or capital to an endeavour with the expectation of obtaining an additional income or profit. In today’s world, investment has become an essential aspect of financial planning, and it offers numerous benefits to individuals, businesses, and the economy at large.

Little Time Commitment

Stock index owners do not have much work to perform. By investing in an index, they let the market handle the work. To generate returns that are on par with the market, investors simply hold their positions for a long time.

A Savings Plan That Grows

Saving money is similar to investing, but with investing, money can rise considerably faster than it does in most savings accounts. Most investors choose to preserve money for retirement or potential future expenses. While it is possible to keep some emergency funds in a savings account, many investors choose to invest a sizable amount of their savings in assets that yield a higher rate of return.

Investments Can Provide Income

Whether now or in the future, investments can generate consistent income from stock dividends or interest (bonds). When you purchase a bond or stock that pays dividends, you will receive a predetermined monthly amount. This income stream may be put to other uses or reinvested to benefit from compounding returns.

Disadvantages of Investment

Like any other financial decision, investing also comes with its fair share of risks and drawbacks. While the potential returns on investments can be substantial, there are also several disadvantages to consider.

Possibility of Loss

Losses are a possibility while investing. Although significant stock indices have increased over protracted periods of time, there is no assurance that the market will increase over the course of an investor’s time horizon.

Compounding is Slow

Capital does not compound as quickly in investments as it does in profitable short-term trading. A good investor will therefore generate lesser returns than a competent day trader or swing trader, everything else being equal.

Investing is not Active

With trades lasting a long time and minimal active buying and selling; investing is often passive. Investors who enjoy conducting extensive market research and being active may not find this appealing. Nevertheless, there is always the choice to trade actively while simultaneously making some investments.

Savings Vs Investment Overview

Savings and investment are two financial concepts that are often used interchangeably, but they are not the same thing. Savings refer to money set aside for a future purpose, while investment involves putting money into assets with the aim of generating income or profits. Read ahead to learn the difference between savings and investment.

Aspect

Savings

Investment

Purpose

Short-term goals such as emergencies, vacations, or a down payment for a house

Long-term goals such as retirement, education, or building wealth

Returns

Minimal returns with low risk

Potentially higher returns with higher risk

Risk

Low-risk savings are typically held in low-risk savings accounts or CDs

High risk, depending on the investment type

Liquidity

High liquidity as savings can be easily accessed and withdrawn

Lower liquidity depending on the type of investment

Time horizon

Shorter time horizon as savings are typically used within a few years

Longer time horizon as investments are intended to grow over time

Diversification

Not typically diversified as savings are often held in a single savings account or CD

Can be diversified by investing in a variety of assets such as stocks, bonds, and real estate

Savings Example

Whether you are saving for a down payment on a house, an emergency fund, or a dream vacation, the benefits of saving are undeniable. Saving can be challenging, but it is crucial to establish good habits early on. In this article, we will explore various savings examples that can inspire you to start saving and help you achieve your financial goals. From creating a budget to automating your savings, we will share tips and tricks to help you make the most of your hard-earned money. So, get ready to see examples of how to save like a pro and take control of your finances!

The 52-Week Money Challenge

This is a popular savings challenge where you save a certain amount of money each week for 52 weeks. For example, you could start with ₹1 in the first week, ₹2 in the second week, and so on, until you save ₹52 in the last week. By the end of the year, you saved ₹1,378!

The 24-Hour Rule

This is a savings technique that helps you avoid impulse buying. When you see something you want to buy, wait 24 hours before making the purchase. This gives you time to think about whether you really need the item and if you can afford it.

The No-Spend Challenge

This is a savings challenge where you commit to not spending any money for a certain period of time, such as a week or a month. During this time, you focus on using what you already have and finding free or low-cost activities to do. This can help you break bad spending habits and save money in the long run.

Investing Example

Investing can seem intimidating, but it is one of the most powerful ways to build wealth and secure your financial future. Whether you are a seasoned investor or just starting out, there are countless opportunities to put your money to work and potentially earn significant returns. From stocks and bonds to real estate and alternative investments, the possibilities are endless. To illustrate the power of investing, let us take a look at a real-life example of how one individual turned a small initial investment into a massive fortune.

Real Estate Investment Trusts (REITs)

REITs are companies that own or operate income-producing real estate properties, such as office buildings, shopping centers, and apartment buildings. By investing in REITs, investors can enjoy regular dividend payments and potential capital appreciation.

Growth Stocks

Shares of businesses that are anticipated to rise faster than the broader stock market are known as “growth stocks.” These companies typically reinvest their profits into their businesses rather than paying dividends to shareholders. Examples of growth stocks include tech giants like Apple, Amazon, and Google.

Index Funds

An index fund is a type of mutual fund or exchange-traded fund (ETF) that tracks a specific stock market index, such as the S&P 500. Index funds offer broad diversification, low fees, and historically have performed well over the long term.

When to Invest and When to Save?

Investing and saving are two essential pillars of financial stability and security. While saving your hard-earned money can provide a sense of security, investing your money can help grow your wealth and create a better financial future. But, when it comes to deciding between investing and saving, it can be confusing and overwhelming.

Let us now see when to invest and when to save based on your financial goals, risk tolerance, and current financial situation.

When to Save

Saving money is crucial for achieving short-term and long-term financial goals. Here are some situations when saving should be a priority:

Emergency Fund

Building an emergency fund is the first step toward financial security. Aim to save at least three to six months of your living expenses in a separate account, which you can use in case of unexpected events such as a job loss, medical emergency, or any other financial crisis.

Large Purchases

If you are planning to buy a car, a house, or any other expensive item, saving for a down payment can help you secure better interest rates and lower monthly payments.

Short-Term Goals

If you have any short-term goals, such as saving for a vacation or a wedding, saving money in a high-yield savings account can help you achieve your goals faster.

Low-Risk Tolerance

If you have a low-risk tolerance, saving your money in a low-risk savings account or CD can help you avoid any potential losses.

When to Invest

Investing your money can help you achieve long-term financial goals, such as retirement or wealth creation. Here are some situations when investing should be a priority:

Retirement

If you want to retire comfortably, you need to start investing early. Investing in a retirement account can help you save for retirement and take advantage of compound interest.

Long-Term Goals

If you have long-term financial goals, such as buying a second home or starting a business, investing in stocks, mutual funds, or real estate can help you achieve your goals.

High-Risk Tolerance

If you have a high-risk tolerance, investing in high-risk assets such as stocks or cryptocurrency can help you earn higher returns.

Inflation

Saving money alone may not be enough to keep up with inflation. Investing your money can help you keep up with inflation and protect your purchasing power.

How Much Money Must Be Saved Vs Invested?

Money is an essential part of our lives, and we all have financial goals we hope to achieve. Whether it is buying a house, starting a business, or simply building a nest egg for retirement, the key to achieving these goals is a good understanding of the difference between saving and investing.

While saving and investing may seem interchangeable, they are distinct financial strategies with different outcomes. Saving is the act of setting aside money for future use while investing involves putting your money to work in order to generate a return.

The question of how much money to save versus invest is a critical one, and finding the right balance is key to achieving your financial goals.

1.The greatest choice actually relies on your ambitions and present financial situation. Save money if you anticipate needing it soon or in an emergency. If you have three years or more before you need the money, invest it.

2.If you have saved money for emergencies, you can start investing. Three to six months’ worth of spending should be saved away as an emergency reserve.

3.If you want to reach long-term objectives, such as retirement, investing is crucial.

Remember, even though investing can be complicated, there are simple ways to start.

Conclusion

Financial investments are made with the expectation that they will only produce financial returns in the form of cash flow from the entity making the investment. In contrast to strategic investors, the investor depends more on the current management. Any process employed to produce future income might be considered an “investment” in this context. This includes acquiring bonds, equities, or real estate in the financial sense.

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

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