Investing v/s Saving
Investing v/s Saving
The terms savings and Investing are often used interchangeably. However, one must understand that these are different concepts that work in tandem. This article will emphasise on the differences between saving and investing
What is saving?
Saving is the act of setting aside money for a future need or expense, i.e. for unforeseen situations. Financial institutions offer several savings’ options, the most common being savings account in a bank, or fixed deposits, etc.
What is investing?
Investing is the process of putting your money in financial products and investment avenues that offer the potential to generate income or aid in wealth creation. The most popular investment options in India include stocks, mutual funds, real estate, bonds, ETFs (exchange-traded funds), etc. It’s important to remember that risk and return go hand in hand when it comes to investing.
Why is Saving important?
Emergency Cushion: Savings are a must regardless of the purpose for which they are ultimately used. Emergencies can come unannounced: you might lose your job, or have a medical emergency in the family, or plan to start your own business. In these circumstances, you need liquidity to fall back on.
Stepping stone to investing: Saving is the difference between your income and expenses. Out of the money saved, allocate a small portion to liquid assets such as bank fixed deposits or liquid funds and the rest to long-term wealth creation.
Why is Investing important?
Earn higher return: Investment avenues such as mutual funds or stocks have the potential to fetch higher returns than fixed deposits or savings account. But higher returns come at the cost of higher risks.
Realise your financial goal: Whether it’s buying a house, a car, or saving up for your marriage, or paying for your child’s higher education, or planning for your retirement, investing can help you to meet all such financial goals. Investing your money is one of the best ways to achieve your long-term goals.
Beat inflation: Investing your money helps you to beat inflation over time. If you don’t invest, chances are your purchasing power will decline as inflation tends to eat away the value of money over time. To insure yourself against this situation, it makes sense to invest your money in investment avenues that have the potential to yield inflation-beating returns.
Which is better? Saving or Investing?
The right choice between saving and investing depends on your financial position, risk tolerance, and financial goals. However, you can consider following these two rules:
- If you need the money shortly, say within a year or so, or you wish to create an emergency fund, you might consider a savings account.
- If you want to grow your wealth over the long-term, then you might consider investing.