Saving vs Investing. Which one is better? Understand the difference
In the previous article, we discussed Mutual funds vs FD to find out which is a better asset for your child’s future. In this article, we will talk about Saving vs Investing. Savings and investing involve different goals and functions in your financial strategy.
Saving money entails depositing money in secure, liquid accounts, whereas investing entails purchasing assets, such as stocks, to make a profit.
Before you start your journey to riches and financial independence, you must understand this fundamental difference.
Difference between Saving vs Investing
Saving money implies putting away money by depositing it in highly secure securities or accounts. The money is also liquid, which means it can be turned into cash quickly.
Above all, your cash reserves must be there when you need them. They must be ready for use to meet all your immediate needs and wants. Some examples are: keeping money in cash form, in a savings account etc.
Investing money refers to utilizing your cash or capital to purchase an item you believe has a fair chance of creating an acceptable return over time.
Investing is to increase your wealth, even if it means going through significant volatility for months or even years. Actual investments have the backing of a margin of safety, usually in of assets or earnings from the owner.
Stocks, bonds, and real estate are some of the best investment instruments.
|Basis of Distinction||Investing||Saving|
|Definition||The exercise involves investing the money saved so as to generate profits and capital appreciation||The income or money left at hand after meeting all expenses|
|Purpose||The purpose of investing is capital appreciation and wealth creation. Investing in your alpha tool, which fights increasing inflation and helps you create wealth.||The purpose of saving is to meet short-term and long-term requirements. And also, to tackle unforeseen events. Saving is the foundation of your investment portfolio.|
|Returns||The biggest advantage of investing in high returns is that it provides some exposure to market volatility as well. If you are a risk-averse investor or have a little risk appetite, you can choose to invest in debt funds.||Saving is not done with the view to generating returns. Since there is negligible or little risk involved with the money, there is very little return – generally, a percentage or two on the instruments where you save your money.|
|Risk||Investing has its fair share of risks involved because of the market volatility, the risk and return depend on the mood of the market in general.||Saving money has no volatility risk. The thing that can possibly happen with your money is that it can diminish in value owing to rising inflation.|
|Liquidity||Investments vary in liquidity depending upon the instruments.||Liquidity is the primary purpose of saving.|
An important difference
The most significant distinction between saving and investing is the Risk Factor. When you place your money into a savings account, such as a money market account or a certificate of deposit, you are saving.
It has a very low danger of losing money but has very little chance of making money. When you save money, you have access to it as and when you need it.
When you invest money, you have the chance to make higher long-term profits or rewards. But you also have an opportunity to lose money. You can take on more risk for a higher return, but your potential loss is also more significant.
It is critical to assess your objectives to determine which alternative is ideal.
Making the wrong decision can cost you a lot of money in fees or even result in a loss of future investment revenue. Another distinction is interest or profit.
The primary purpose of investing is to make money, whereas the motive of saving is to keep money secure while earning relatively little.
Saving vs Invest: Which comes first?
Almost often, saving money comes before investing money. Saving is the foundation upon which your financial dreams are based. The logic is simple – unless you possess a certain sum of money, you will need to rely on your savings to fund your investments.
In rough times when you need money, you’ll probably have to sell your investments at bad possible times, and that is not a prescription for financial success.
As a rule of thumb, your saving should be able to cover at least three to six months of your expenses – usually known as an emergency fund.
You can start investing until you have things in places, such as an emergency fund, health insurance, and life insurance.
You will benefit from significant tax cuts with the help of these instruments like insurance. You will also have a safety net to bear volatility even in your investments.
Which one is for you?
There is no particular answer to this question because saving is a means to your investment journey. If you have good savings and if you can generate a safety net around your wealth, you can start investing that day itself.
It all depends on your planning, your needs, and your future goals. Make your decision wisely and choose the instruments carefully.