Savings and Investments are two commonly used terms in our daily lives because they are both related to money, which is ultimately responsible for making our future secure and comfortable. We often use them interchangeably, but each represents different actions and ideas.
What do they really mean?
Savings—In simple language, savings is setting aside funds to meet certain expenses that are usually immediate or short-term and small in amount.
Investment - This refers to the act of putting money in some kind of financial instrument that will lead to its growth within a certain period, which can be used later on for productive purposes.
Differences between investing and saving.
Basic act - The basic act of savings is putting or storing aside funds, usually piggy banks, personal lockers at home, or savings accounts or banks. The money lies idle until it is used to buy something or for some emergency. But the essential act of investment is putting the money in some financial instrument like a fixed deposit, mutual fund, stock market, buying gold, bonds, property, etc., all of which will lead to appreciation or increase in its value.
Risk - Another difference between investing and saving is that saving will have very little or no risk at all because the fund is lying with you or in the savings account of a bank. Thus, there is either very little or no return at all, thereby no risk. In comparison, investment will entail risk since the fund is being put to use in some instrument that may or may not perform well.
Return—From the above point, we can easily derive that savings will yield very little or no return at all. In contrast, investments will definitely have some amount of return potential, depending on the investment option. This is an essential concept among saving and investing differences.
Period - Savings are typically for short-term requirements like purchases, medical emergencies, vacations, payment of school and tuition fees, etc. Investments are used to meet long-term goals like college fees, buying property, retirement plans, etc.
Inflation effect - Savings may get eroded due to inflation since money is not growing to match the fall in money value over time. Investment accounts for inflationary losses because the returns are calculated after accounting for them, and therefore, the return amount is higher.
Commitment - Another concept in investing vs. saving money is that commitment and consistency are not so important in savings because they are for small amounts and short-term needs. However, it is essential to be consistent and committed to investment if you want to grow your money; otherwise, the returns will not be enough to meet your long-term goals.
Diversification—Savings do not require diversification because, first, the return is already very low, and second, they are meant for quick and small needs. Investment requires diversification to balance the risk of one instrument with the profit from another so that, in the long run, enough money is accumulated to meet our goal.
Effect on the corpus - Savings will only allow the fund to grow a little. However, investment, if done with proper knowledge and in the right manner, allows the corpus to grow very well over time.
Conclusion
Thus, investing vs. saving money is quite an interesting topic of discussion, and these are two things that every individual should start thinking about very early. However, it is essential to understand our individual risk appetite, financial goals, and time horizon for both. It is always a good idea to seek professional help to plan our finances better.
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