Investing vs saving – Know the key differences
Savings and investments are often used interchangeably by many; however, there are some clear differences at play. But a mix of both goes a long way in securing your future – be it short-term goals like buying something or planning a vacation, or long-term ones like buying a house or planning your retirement.
What does savings mean?
When a certain amount of money remains in hand after all the expenses are met out of the total earned income, that amount is called savings. You can also save intentionally for fulfilling a future goal, such as planning to go on a vacation with family or buying a particular product.
What is investing?
Investing is savings plus some value-add. Investing can be either for capital appreciation or dividend income or both. Generally, people tend to invest money in financial instruments like mutual funds, shares, precious metals or gems, real estate, etc., to maximise returns out of their current investment over time.
What is the difference between savings and investing?
- The idea behind an investment is capital appreciation or dividend income, whereas savings are for meeting your short-term or unplanned requirements.
- Saved money is helpful during emergencies. Savings are hassle-free as you can easily save the unconsumed money after clearing off all expenses and deposit it either in a savings account or simply hold the cash in hand.
- The risk in savings is quite less, but the value of the money depletes due to inflation.
- Conversely, investing helps fight inflation and creates wealth. However, investment should only be made when investment instruments are aligned with your overall financial goals.
- The key difference between saving and investing is the risk factor. Both are prone to risk, with varying degrees and types. If you hold your savings in the form of cash, there is a risk of theft or depleting value due to inflation. When parking your savings in bank accounts or deposits, you could face interest rate risk or the risk of higher taxation on your matured deposit.
- When it comes to investments, the success of an investment depends on the market’s volatility.
- The returns could be high or low depending on the market fluctuations for your investments.
What is the need for each?
Investments and savings are entirely different and should align with your financial objectives. If your goal is to just accumulate enough for contingencies and benefit from higher liquidity, savings could be the route for you. However, if your objective is to create wealth over time, you should opt for investments.As the power of compounding helps to make better gains, the earlier you begin to invest, the better it will be.
Irrespective of the difference between savings and investments, it is imperative for you to make the right choices for a financially secure future. In order to build wealth over time, it is essential to invest your money in different investment instruments that can attract good returns. When making such important financial decisions of where, when and how much to invest, it is prudent to reach out to a financial expert who can suggest investment plans that are unique to your financial goals and risk appetite.