Saving and investments are two important factors for every person. They can be used in various ways to meet expenses but it must be understood that there are some major differences between the two.
Some individuals consider saving and investing as the same thing. That’s a big mistake. There is a clear, huge difference between saving and investing, and figuring out the difference could spell the difference between a comfortable and difficult financial life.
How are saving and investing differently?
If I explain the difference between the two of them in one line is that saving is simply preserving your money and investing is growing your money. If you want to grow your money, IT is necessary to save and invest both. if you are doing only one, then it may lead to financial problems in a near future.
Some of the differences between saving and investment
The top difference between both of them is time. Saving can be done for a shorter period of time and investment is for a longer period. saving is like saving money in a piggy bank, cash form, or in a saving account.
Generally, Saving is for a short terms goals like buying a car or a bike, or any other small need. This can be of 6-12 months. People financial save money for unexpected expenses or any other urgent money requirements.
Investments are made to generate returns over the period that can help in capital formation. These are generally for more than 5 years. We can do investments in stocks, bonds, mutual funds, etc
The second difference between saving and investment is a risk. The risk in the case of saving is zero or very low because you are just saving money in the form of cash or in a saving account or fixed deposit. These are the safest options for saving money. But in investment, there is more risk of losing your hard-earned money. As in investing like stocks or mutual funds, these are based on market performances. There are no guarantees at all. You always heard a PHRASE in a mutual fund that Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing.
The third difference is the return
The returns on the investments are very less. As if you are saving in the form of cash it’s zero return, if you save in your saving account, then it is like 3-4% returns and if you are saving in fixed deposits then you will get a return of 6-7%.
On the opposite, as investment has more risk so it also has more returns. Investments in stocks can be doubled or even tripled also. By investing in mutual funds after researching for the best mutual funds you can even get 30-40% returns.
The fourth difference between saving and investment is liquidity. The liquidity of saving is generally high. If your saving is in your saving account or in fixed deposits, you can easily get your money in any emergency requirements but when you invest your money in stocks, bonds, or mutual funds, then it takes some time to sell your investments. It generally takes 3-4 days or up to 1 week.
The fifth difference between them is protection
There is a term named inflation which means “A general rise in the price level of an economy over a period of time”. In other words, the same amount of money buys less cash today than last year. The inflation rate in the united states is about 5% and in India, the inflation is 6.3%.
So, if you are saving in a saving account having 3-4% returns that means you are actually in loss of 2-3%, and if you are saving in fixed deposits having 6-7% returns that means your returns are only 1-2%. Savings give less protection against inflation.
But in the case of investments having returns up to 30-40%, you are 100% protected against inflation. Your money is safe.
Now after reading the above article you will understand the difference between saving and investments. Both saving and investing are essential in terms of having a financial plan in place. However, they’re totally different instruments, used for various time durations and totally different targets.
Saving is for a shorter period of fewer than 5 years and investments are for a longer period of more than 5 years. Investment supports you at the time of your retirement. In case you are doing neither saving nor investments, start today even if you are in your 20s.
So which is better – saving or investing?
It totally depends on you and your financial condition. But if today you don’t have both, then start with saving. And when you have enough money that you don’t need for 5-6 years then you go for investing. Even investing small is good than nothing.
How are saving and investment similar
The main objective of both the savings and investments in the same i.e saving money for the future. In the case of saving, it is for short period and in investment, these are for a longer one.
Why you should do both
Yes, you have to do both. To be financially free, you need to save for emergency money requirements, and for the future like for your retirement, you have to invest today for a better future. You have to make a balance between both of them. Neither all your money in savings nor in the investments
This concludes the article on the difference between savings and investments. To read more content related to personal finances, insurance, investment, stock market, mutual funds, etc., stay tuned to our blog.