Saving Vs. Investing: What’s the difference & which is better?

Everyone wishes for a financially secure and comfortable future. Whether it is buying a house, taking vacations, engaging in higher education, marriage, or even post-retirement comfort, is all a consequence of financial prudence.

However, the concept of financial security accompanies buzzwords like ‘savings’ and ‘investing’ interchangeably and a lot. Are these the same? What’s the difference between saving and investing? Are you saving or investing? How does one differentiate between savings and investments? Read on to find the answers.

What are Savings?

Saving money essentially includes setting aside a part of your earnings consistently and regularly. You control your expenses and let the surplus amount remain in your savings bank account. This is usually a permanent fixture on your monthly or periodic budget. One should not throw caution to the wind with what they earn.

What is Investing?

With substantial savings in hand, investing money is a lucrative option to help achieve your financial dreams faster. Investments allow your money to grow and enable you to build wealth. The interest you earn on your savings bank account is generally a nominal amount. However, investing in mutual funds, stocks, and other financial products, can fetch you a considerably higher return. It’s important to remember that investments need substantial knowledge and monitoring. You must be cautious with the investments you make.

• Time factor

  Savings are apt for the short-term and for fulfilling relatively smaller financial goals. For example, you could be saving for a new laptop or a vacation.

  On the other hand, investing is a long-term process meant to fulfill larger financial objectives. Like planning for a wedding or your higher education.

• Risk

  The risk of losing money in savings is minimal as compared to any investment. Investment products may involve risks that arise with the market position. The risk associated with investing varies depending on the channel and medium of investment. Investing in the equity market comes with an inherent risk. Products like mutual funds provide the portfolio details and additionally indicate the possible risk involved. To gain the sweet fruit of investing i.e. returns, it is advisable to avail the services of financial advisors like IIFL. As mentioned earlier, one of the larger differences between saving and investing is that investing has the potential to earn greater gains than savings.

• Returns

  The least risky channels to save are through bank savings accounts and fixed deposits. Banking products like fixed deposits may earn a return of 6 to 7%. While interest earned on savings accounts is much lower. Investments in equity or equity-based mutual fund schemes have substantially higher potential for long-term growth. Wisely made investments promise higher returns than regular savings.

• Liquidity

  Savings are handy in times of emergencies or to combat unforeseen adverse events. You have absolute access to your money in savings. You can withdraw or expend however much you’d like to. Liquidity is not a constraint.

  On the flip side, one also tends to spend liquid cash more easily. With investments, liquidity norms vary depending on the investment instrument. Long-term investments also offer the additional benefit of tax-saving.

• Purposeful Finance

  Why do you want to save or invest your money? Are your goals short-term or long-term? How much should you budget for saving or investing from your earnings? You need a purpose that will guide you in making prudent decisions that are aligned with your goals.

What should you invest in?

It’s never too late to begin investing. If you are only just starting, here are some popular investment instruments that you can look at:

• Mutual Funds

  A mutual fund is an investment scheme formed by an asset management company (AMC). Such an AMC, pools investments from several individuals and institutional investors with common investment objectives. These can be equity funds, debt funds, or a mix of both known as hybrid funds. Mutual funds make excellent investments for individual investors to gain exposure to a portfolio managed by an expert. Mutual funds are a good way to diversify your portfolio and reduce risk concentration. We also suggest investing in more than just a single mutual fund.

• Stock Market/Equity

  Investing in equity shares helps you outrun inflation by promising a relatively higher rate of return as compared to other avenues. However, it is important to consider the complexities and volatility of the market before doing so. Investing in stock is not for the weak-hearted. While doing so, make sure you diversify your stock purchase across a variety of companies, businesses, and industries in the market.

• Real Estate

  This is another fruitful avenue of investment. The real estate bears return in more ways than one. It offers regular passive income in the form of rentals as well as value in the form of capital appreciation. Real estate is as risky as it is a great investment. Much like the stock market, property values fluctuate.

What’s the best time to start investing?

Generally, it is recommended that you pay off the majority of your debt before investing. However, if your debt is interest-free, it may be more sensible to start investing while subsequently paying your debt off. Investments have the potential to earn a greater rate of returns.

Before you begin your investment journey, it makes sense to have an emergency fund in liquid money in the form of savings. A suitable channel to do this is by way of a money market account at your bank.

Investing can help you generate wealth. It is in your greatest interest to stick to a regular budget that factors in saving and investing.

Final Word

Understanding the differences between saving and investing is only the beginning. Knowing when and more importantly, how to save or invest your money is a key part of the process of growing and managing your wealth.

Frequently Asked Questions

Who Can Help Me Start Investing?

The financial advisors at IIFL can help you make the right financial decisions regarding your potential investments.

How much savings should I invest?

One should invest at least 20% of their income. Periodically, if not at one go. This can later be increased if and when possible.