Differences Between Savings and Investments

You must have heard the terms ‘saving and investing’ in your day to day life and sometimes these two terms are even used interchangeably. However, when it comes to financial terms, these two terms are very different. Read on to understand the difference between investing and saving. Also, stay tuned for a detailed saving vs investment comparison to know is it better to save or invest.

What is Saving?

Let us begin with understanding what is saving. Saving refers to keeping aside a part of your income to meet sudden financial requirements or short-term goals. Simply put, saving meaning is the amount of income that you do not spend. Now, depending on the planning of an individual, they may either set apart a part of their income at the beginning of the month or save the leftover amount after all the expenses.

The former is usually a better idea since it gives you clarity on your monthly expenses and sets clear savings goals. You may save it for an upcoming vacation, keep it for emergency fund requirements, etc. These are some of the common savings examples.

Here’s a saving example you may remember, like the childhood fun of savings in your piggy bank. That’s exactly the concept of savings. One may save in their savings bank account, which is a highly safe way of accumulating your wealth. However, over time, the value of the saved amount may decrease due to inflation. So, it is important to keep investing to grow your wealth rather than just accumulating it.

What is Investing?

To understand the difference between investing and saving, let us now take a look at what is investment. Investing refers to a more complex method of corpus building. Simply put, investment meaning refers to a method of putting your saved money into various investment tools like stocks, mutual funds, real estate, bonds, debentures, etc.

When discussing what are the differences between saving and investing, you need to know that unlike savings, where you simply keep money in a savings bank account, or just keep it aside, investing requires putting your money in different financial assets for growth. So, investment actually grows your money rather than simply accumulating it. However, with the high growth potential, investment also attracts high risk. Some of the common investment examples are real estate, stock market, etc.

When it comes to saving vs investment, you need to understand that to invest, you may first need to save. Later you may go for investment when you have a sum amount that can be invested for the long term. Investment is usually an option when you are planning for a long-term financial goal and you have set aside an emergency fund other than investments. So, now that you know what is the meaning of investment, you would understand that investments have the potential to outpace inflation and grow your money. Read on as we discuss the importance of investing and saving.

Difference Between Savings and Investments

Now that you have an idea of what is saving and investment, let us compare the two for deeper understanding. The table below contains various differences between savings and investments:

The above table highlights the difference between investing and saving. You may conclude that savings are low-returns and low-risk financial planning, while investments are high-returns and high-risk financial profiles. So, depending on your financial plans ahead, risk appetite, and requirements, you may choose one or both.

Ideally, choosing both savings and investment is crucial for sustainable and profitable finances over time. Only savings may deplete the value of funds over time, while only investment may keep you short on liquid funds required for immediate financial requirements.

Which is Riskier, Saving or Investing?

Needless to say that the importance of saving and investing both is crucial. The benefits of saving money are far too many to list. However, when it comes to the risk factor, it is obvious that investments are riskier in comparison to savings. This is primarily because the purpose of investment is financial growth, while in the case of savings, the purpose is accumulating a part of your income.

Investments usually put money into market-driven tools like mutual funds, stocks, bonds, debentures, etc. These tools have different levels of risks associated depending on the type of investment. So, along with higher returns, the risk is also higher.

On the other hand, savings is almost free from risk. Whether you save money through recurring deposits, fixed deposits, or simply in your savings bank account, it does not involve market risks. However, since these are not exposed to the market, the returns are also quite low. In most cases, the returns may not even outpace inflation. So, along with risk assessment, it is also essential to pay heed to the potential returns.

When to Choose Savings Over Investments?

Now that you are aware of the meaning and differences between savings and investments, the question arises: is it better to save or invest? Well, at times, you may have to prioritise savings over investments and vice-versa.

Let’s understand under what circumstances you can choose savings over investments. Here’s a quick guide to Savings vs investments explained.

• If you are more inclined towards stable returns and funds security, it is better to go with savings as these are low to no-risk tools.
• Savings are ideal for people who want to fulfil a short-term financial goal. For instance, if you want to purchase a washing machine in the next 7-8 months, you must save for it because investment usually needs 1+ year to bring substantial profit.
• Investment for beginners must start with a financial building journey with savings. It builds a habit of shedding a part of your income for future use.
• Those who do not have an emergency fund must first focus on savings and then only move toward investment.
• Savings can be an option for people with different modes of income, like freelancers, salaried individuals, businesspeople, etc.

When to Choose Investments Over Savings?

Now that you know the purpose and importance of savings, let’s get to investments. Before learning how to start investing, you must analyse if you are ready for it and why investment is important.

Here are some of the reasons why one may choose investment over savings:

• Investment involves potential high risks. So, people who are willing to take risks over conservative, safe savings methods may go with investments
• Investments offer a high growth potential. If you prefer rewarding schemes, investment can be the right choice for you
• Ideally, investments yield returns only when you stay invested for a longer tenure, over 1 year. So, people who are planning for the long term can choose to invest.
• Since investment locks the fund’s liquidity, you must have an emergency savings fund when you choose to invest. Otherwise, you may end up with premature investment withdrawal and low returns.
• To invest, one must have savings elsewhere for regular use. So, it can be said that investment is the next step in savings.

Conclusion

Savings and investments are two sides of financial planning. Although they differ on various grounds, they aim to serve a single goal of wealth accumulation. While savings offer low returns with low risk, investments target high profits with high risks.

Choosing between savings and investments is a matter beyond personal preferences. You need to assess multiple factors before pooling your money for investment. While savings may not require much planning. The amount that remains unused from your income is eventually your savings.

Before investing, you need to be mindful of the savings with you. Investment is always the next step in savings, and investment without savings can be disastrous. As a beginner, you may start your planning with regular savings and eventually turn it into an investment for actual fund growth.