Investment and savings are two of the most important concepts in financial planning. Although they might seem very similar, there is a lot of difference between investment and savings. The line between investing and financial planning may seem blurred if you are new to this area. To answer the question, "What is the difference between investing and saving?" it's important to understand the basics.
Savings is simply the sum of all your income after paying for all your infrequent and regular expenses. These expenses can include rent, utilities and the cost of provisions. They also include medical expenses, travel expenses, EMIs for loan payments, and any other payments that you may need.
Your savings is the amount left over after all expenses have been paid. You can either keep the money you have saved or deposit it in a savings account. Although your savings won't grow exponentially, you can earn a basic interest rate on the money in your savings account.
Investment is, economically speaking, the act of buying an asset you don't plan to use or consume today. Instead, investment's goal is to create wealth and allow capital to appreciate over time. Investment goals can differ from one investor to the next. They could include protecting earnings, making money grow, or earning a steady income.
You can choose to invest in long-term products, or in short-term instruments. You can choose which type of investments you want to invest your money in, depending on your financial goals and your financial plan. You can invest in real estate, mutual funds, gold, unit Linked Insurance Plans (ULIPs), direct equity, or directly.
Both investing and saving money have their advantages and disadvantages. If you choose to save your money but not invest it in any type of asset, there are many benefits. Your money will remain safe and protected without the risk of losing its value. Your savings can be used to achieve specific goals within a time frame. Your money is not protected against inflation so your purchasing power could be affected.
Investing is a great way to earn higher returns over time due to compounding. This allows you to reach your short-term as well as long-term goals more quickly. There are many tax-saving benefits to investing. Your investments could also be subject to market fluctuations that can cause a loss of value.
There are many differences between saving and investing. Let's take a closer look at these factors to better understand the difference between saving and investing.
Savings are considered safer than investing, especially if your savings have been deposited in a trusted bank. If the market moves against you, your capital could decrease. This type of risk is not present in savings, but they are susceptible to inflation.
Many banks offer low rates of interest for savings. The returns you get by investing your money are usually much higher because your money has a longer time to grow. The power of compounding makes money grow exponentially. The market conditions and interest rates can affect the growth of investments. Some investments will grow faster than others.
Savings can be a good option for the short-term because you can set a goal and save up until that target to reach short-term goals such as buying a new laptop or going on an extended vacation. Investments are, however, more long-term. Some investments, such as the Public Provident Fund (PPF), can last up to 15 years. Alternate investments can be left untouched for up to 20 years.
Your savings are more liquid than investment, so you have easy access to them in an emergency. You can withdraw your savings from any bank or cash you already have. You may have to pay a penalty if you withdraw the money you have invested in investments that aren't as liquid.
Which should you choose when saving or investing? You should have both short-term and long-term goals. You can balance the two to ensure you have enough money to spend now and allow some money to grow for a secure future.