Financial security is instrumental. It offers peace of mind and reduces stress as you know you can cover your planned and unplanned expenses. While achieving financial security can be challenging, savings and investment can help you in this mission.
Savings and investment are two critical components of financial planning and are essential for achieving financial goals. Many people use savings and investments interchangeably since their core objective is to help secure an individual’s financial future. However, they mean two different things and serve different purposes.
This article provides a detailed overview of the difference between saving and investing and how they play different roles in assisting your financial plan.
Table of Contents
What Is Saving?
Saving is a process where you set money aside gradually from your income. There are several methods to do it, but the most common is opening a savings account at a bank or other financial institution and parking your idle money. Funds in your savings account can be withdrawn anytime, making them readily available for future needs or emergencies.
Pros And Cons Of Saving
- You get easy access to cash whenever you need it.
- Helps to meet short-term goals such as buying a gadget or funding a vacation.
- Savings generate lower but safer returns.
- It may lose value due to inflation.
What Is An Investment?
Investment means allocating resources to a financial instrument with the expectation of generating inflows or future benefits over time. One can invest in corporate bonds, government bonds, treasury notes, and mutual funds.
Pros And Cons Of Investing
- Investments involve some risks; however, wisely made investments can provide higher returns than regular savings.
- It can help you achieve your long-term goals, such as paying for a child’s education or planning for retirement.
- Investments through mutual funds SIP can beat market volatility over time, making it an ideal strategy for long-term investors.
- It may need continuous monitoring and adjustments per market conditions and financial goals.
What Is The Difference Between Savings And Investment?
1. Objective
The intent of savings is the preservation of capital, while investment seeks capital appreciation. Savings are primarily used for immediate needs/purchases or short-term goals like a vacation. Investments work better for long-term objectives such as accumulating wealth, retirement planning or purchasing a home.
2. Convenience
Saving money doesn’t require extensive analysis. But investments frequently call for thorough market research and long-term commitments.
3. Protection Against Inflation
When inflation increases, the value of money in your savings account can decline. However, most investments can help protect you against inflation over time.
4. Risk And Returns
Saving products like bank accounts are typically considered less risky than investments like stocks. It is because savings accounts offer guarantees on your capital, while investments can fluctuate in value depending on market conditions.
Saving Vs Investing? The Better Option
The choice between saving and investing depends on various factors, including your short-term or long-term financial goals, risk tolerance, and current market conditions. Still, a few general guidelines can help you make the best decision.
- If you need immediate cash access, saving is the better option. Investments like equities can be more volatile in the short term, so there is a risk that you could lose money if you need to sell quickly. However, investing could offer greater rewards if you are willing to take on some risk and plan for the long term. The value of investments tends to rise over time which may generate decent returns.
- If you have built up an emergency fund containing three to six months’ worth of living expenses, you may be ready to start investing. Investment is critical if you want to accomplish long-term goals such as retirement.
- You can start investing if you can save generously even after paying your monthly obligations, such as loan EMIs, insurance premiums, etc.
Investing might seem complex, but there are different ways to get started. You can invest in mutual funds through SIP (Systematic Investment Plan) and invest periodically. Go through the pros and cons of mutual funds to understand the types of investment strategies available, fees, objectives, and risks involved. Once done, you can begin investing through a mutual fund house’s dedicated investing app or official website.