Investing vs Saving for Education: Which is Better?
As a parent, no doubt you want the best for your kids. Global education can open doors and create opportunities for your child like nothing else can.
However, the expenses involved in going to study abroad can be intimidating and discouraging for many people.
Education loans are always an option, but debt is a big long-term liability and is not exactly an exciting prospect, is it?
So, how can you raise funds for your child’s education without having to resort to education loans and other forms of debt? Well, that requires a bit of foresight and planning.
Saving is always an option but is it the best option? After all, you can save what you have but you cannot use your savings to generate more wealth. And with rising inflation, investing may be the better option in the long run.
How is investing different from saving?
Saving money is not a very complicated concept. We all save money, either for future purchases, emergencies, or other causes. Saving money typically involves putting aside money from your income in a safe place, like a bank account or a locker.
Savings can accrue a small amount of interest, especially when you are using a bank account. However, in general, your savings do not compound or generate profit through interest or appreciation in any significant way.
Investing money involves buying and holding an asset for a period of time with the intention of generating profits from it.
When you invest money in the stock market, in bonds, or in real estate or jewelry, you do it with the intention of eventually selling the asset after a period of time and gaining profit.
This profit is gained from the value of your assets changing and appreciating over a period of time due to inflation and/or other factors.
1. Investment generates wealth
This is an important distinction between savings and investment. Investment is a tool for wealth generation. You are not simply setting aside money when you invest, instead, you are using it in a very specific way to generate more money.
While you can earn a small amount of interest on a savings account, this is still minimal compared to the profits that can be gained through strategic investment.
Savings is an instrument of wealth preservation. By keeping your money idle and parked in a bank account, you ensure that it remains safe.
It is not exposed to the market or its constant fluctuations, it stays as it is. This makes savings a low-risk option as compared to investment. However, remember, the lower the risk the lower the returns.
You don’t make any gains or profits from a savings account.
When you have long-term goals like a child education plan to work towards, simply saving is not enough. You need to look for ways to actively generate wealth to counter the ever-rising costs of global education.
2. Investment helps you beat inflation
With inflation, the value of money decreases. Think about it this way, a commodity worth Rs. 500 in 1980 would have been considered fairly expensive.
Today, we can easily spend that amount of money in a single day and not even think twice about it. This is because, with inflation, the value of Rs. 500 has decreased.
So, even if you save a fairly significant sum of money, it may end up becoming insignificant over time as inflation eats its value. Investment helps you beat these odds. When you invest in some asset, its value keeps appreciating over time with inflation.
Therefore, the money that you have invested in the asset appreciates with it. Instead of eating away at the value of your money, inflation helps you generate more wealth.
3. Investment helps you realize your goals
Because investment is an instrument of wealth generation and because it helps you beat inflation, it is also a better way of realizing your financial goals.
Saving does not play out well in the long term for expensive goals. These goals require you to accrue money that may be in excess of what you can reasonably or realistically save.
Investing that money is a more reliable way of achieving your goal amount. Keeping your money idle makes it liable to depreciation due to inflation. Investing helps you generate wealth.
This is why, when you have long-term goals on the horizon, it is better to invest. Such investment obviously requires a strategy. Markets always carry risk and your investments can succeed or they may fail and leave you at a loss.
To counter that, one must always try to invest intelligently and strategically to balance out the risk. Mutual funds and ETFs which are professionally managed investment funds are a good way of doing this for beginner investors.
Then why save at all?
If investing is better in all these ways, then why save at all? Isn’t it better to simply invest all of your extra money? Well, let’s not get ahead of ourselves.
All investment carries risk. Markets can be volatile and unpredictable. The price of your assets may go up in the long term, or they may fall and leave you at a loss.
Savings, on the other hand, ensure that your money doesn’t go anywhere. Keeping your money idle is not always a bad thing.
By doing so you ensure that no matter what happens, you have some money kept secure for rainy days.
Savings can provide you with a much-needed cushion in case your investments fail or fall prey to a market slump. Savings are also a good way to collect money for short-term financial goals. When it comes to short-term or less expensive goals, inflation is less likely to be a factor.
For example, if you are planning on buying a new refrigerator next year, inflation is likely not going to make big problems for you when it comes to costs or the value of your saved money.
Savings are a good way of ensuring you have a safety cushion or emergency fund. It is also good for short-term financial goals. It is always wise to have at least some savings on hand.
Savings and investments are both important ways of preparing yourself for the future. While investment is riskier, it is the best way of ensuring long-term capital gains and wealth generation.
Saving for a rainy day is a wise and responsible thing to do.
However, to beat rising inflation and ensure the best education possible for your child, investment is the smart way to go.
Investing your money through a service like EduFund can help you fulfill your child’s study abroad dreams. You don’t always have to work hard. Work smart.
Will my bank FDs help me beat education inflation?
Regular bank FDs usually provide up to 7 or 7.5% returns. Education inflation, on the other hand, increases at the rate of 10% every year. This means that FDs do increase your money but do not increase the value of your money; hence, they fail to beat education inflation.
Is it more important to save or invest?
Savings are Important, of course. However, savings don’t necessarily increase the value of your money with time due to inflation. You need a plan that gives your returns higher than inflation. And that solution is an investment.
Which is easier: Saving or investing?
To a beginner, investing may seem like a complicated domain to enter, but with some basic research and through easy-to-access tools like the EduFund app, investment can be as easy as having a savings bank account.
Consult an expert advisor to get the right plan