The majority of individuals, particularly the new investors, think that saving and investing are the same. However, they are completely two different concepts with very different functions and roles in your financial plan and balance sheet. Hence, before setting out on your path to building wealth and attaining financial independence, make sure you understand these key ideas.
What Is Saving?
Saving is the act of keeping money aside in savings accounts or saving in guaranteed plans/ FDs etc., for future needs or financial emergencies. As a result, the saved money is readily available at the time of need or emergencies. Thus, such money is saved in liquid and low-risk financial products.
Some of the important features of savings are as follows:
- Physical cash, or the money saved in financial products, generates decent interest.
- Savings enable you to achieve short-term objectives like taking a vacation or purchasing an item.
- There is minimal to no risk when saving money i.e., you have the guarantee to get your money back.
- The savings fund should be easy to access in case of emergencies to withdraw cash from.
Example of Saving – Guaranteed Savings Plans
Sanjay, who is 30 years old, works for a private corporation. He intends to to send his son abroad for higher education, but he hasn’t yet saved enough money. He wouldn’t be comfortable taking a personal loan for his child’s education by the time he is crosses 50 years of age. Hence, Sanjay made the choice to purchase a Future generali new assured wealth plan after giving it some serious thinking because it would provide guaranteed returns at the end of the 10-year policy period. Savings will allow him to support his son’s higher education and help achieve big milestones in life.
What Is Investing?
Your savings sit there doing nothing, while your investments grow. Investing and saving are both based on collecting small sums of money. However, it is generally considered smarter, more acceptable, and more economical to invest in a product that earns compound interest.
When you invest your money, you take on additional risk in exchange for a higher returns on assets that grow in price over time. Investing is often unstable and risky. Selling your assets at a profit, or earning capital gains, is how you generate returns.
- You can make a significant profit by investing in many asset categories.
- You can achieve long-term objectives, like buying a house, by investing your money.
- There are some risks associated with investing, such as those caused by changing interest rates or other economic conditions, which could result in losses.
- You can potentially grow your net worth and gradually accumulate wealth by investing your money.
Example of Investment – ULIPs
A monthly investment of Rs 8,000 compounded at a modest 8 percent would easily fetch you returns of 52.63 lakhs after 25 years. Similarly, here’s how saving more can in a ULIP such as Future Generali Bima Advantage Plus , can get you more returns through the power of compounding:
Insurance plans like unit linked insurance plans and endowment plans (child plans,retirement plans, short-term plans) make use of compounding while making you commit to paying amounts steadily as well as making your investments dedicated to specific goals. Over and above, it secures your loved ones with substantial financial coverage in case you meet an untimely demise.
How Are Saving and Investment Similar?
Both saving and investing have the same objective, which is to help you acquire money to use in the future, so they are similar in many respects. In general, financial instruments that hold savings and investments have a monetary worth. To collect funds, both need specific accounts with a financial institution. And both need financial planning, which includes examining your financial goals.
What Is the Difference between Savings and Investment?
Savings are different from investments in that they are frequently deposited into products that offer guaranteed returns like savings plans, FDs, etc. On the other hand, investing includes purchasing assets with the possibility to appreciate in grow over the years, such as ULIPs, stocks, and so on.
However, let us talk in detail on some of the major differences between savings and investment are:
- Objective – The main differentiation between investing and saving is the reason why each is done. Savings can be done quickly, are used for immediate needs and purchases, and are tax deductible. Larger objectives like accumulating wealth, supporting education, purchasing a home, etc., are attained through investments. They frequently call for thorough market research and long-term commitments.
- Protection against Inflation – When inflation increases, the value of money in a savings account decreases, but investments are great financial tools to fight inflation.
- Returns – On your savings, you typically receive a set and consistent amount of interest. Contrarily, investments have the possibility to provide significantly larger returns.
- Risk – Savings typically carry very little to no risk. You will always receive consistent income on savings vehicles including FDs, guaranteed plans, and savings bank accounts. Investments, however, come with a considerable risk because their value might change depending on the market and other economic and financial circumstances.
- Liquidity – Savings products often have significant liquidity. As a result, they give you instant access to money whenever you need it. However, investments typically offer little liquidity, therefore trusted financial advisors suggest not to invest your emergency savings.
So, Which Is Better – Saving or Investing?
There is no such thing as one being better than the other. Both savings and investments are equally important and a must-have in your financial portfolio. However, “How much to save and how much to invest?” depends on your risk appetite, financial position, and financial goals.
When Should You Save Money?
If you have an income but with little or no money in hand, you should start saving. Make it a point to accumulate enough cash savings to last for six months’ worth of spending. This safeguards you from unforeseen economic crises like a car accident or job loss.
Saving is also advisable for achieving short-term investment goals. A few examples are paying for a vacation, child’s higher studies, or a child’s wedding. Saving is a better option than investing if you have 10 years or less to attain your objective.
Keep in mind that trying to save money can be difficult if you have high-interest loan(s). Some will suggest that paying off the loan before saving is preferable. However, it’s risky to live without an emergency fund. You would need to borrow extra loan in the event of an unexpected expense. To prevent that from happening, save what you can while paying off loan.
When Should You Invest Money?
Saving is probably better than investing if you have at least ten years until you need the money and you do not really mind taking any risk.
If you have a sizable emergency fund and no high-interest loan, investing your excess funds can help you gradually increase your wealth. If you want to reach long-term objectives, including retirement, investing is essential.
If you have money coming in, no high-interest debt, and an emergency fund of money, you should invest. Because you won’t incur more interest costs, paying off debt offers a sure return. The prospective return and timeline of investing are less certain. Before you begin investing, do the safe thing and pay off your higher loan bills.
Conclusion
Both investing and saving are fundamentally different ideas that must be developed in combination if wealth is to be created in this booming economy. If you want to build wealth and stay up with the ever-rising demands, investing is a need. The earlier you begin, the better, as over time your investments will compound and the magic of compounding will work wonders to create a wealth kingdom for you. Linking your investments with your financial goals can provide a secure and secured future with saved capital ready for exploration.
