Saving and investing: Two terms often used interchangeably but in reality they are quite different from each other. Both are equally important because to invest you need to save first and for achieving financial goals you need to do both.
What are savings and for what do you save?
The money left over after subtracting all your expenses from your incomes are your savings. For example: Tina gets a monthly salary of Rs. 60,000 out of which she spends Rs. 20,000 on rent, Rs. 5000 on groceries, and Rs. 10,000 on other expenses. The remaining 25,000 are her monthly savings. You’d save money for different reasons like a holiday, an emergency, a house, a car etc. Usually savings are for achieving short term goals. Saving money becomes easier with a bank savings account because when its in a bank it’s safe and you don’t get tempted to blow it all up at once. Apart from that the bank also gives a small interest on the deposits you keep in there.
What is investing and for what do you invest?
Investing means exchanging savings for something that will bring you monetary benefit in the future. It means growing your savings into something more. For example: when you invest in stocks and hold them for a while in the future and the stock prices rises you will get monetary benefit out of it. Investing is for achieving long term goals like children’s education or your retirement.
Savings v/s Investing:
1. The ways:
Saving: You can save your money in a bank account, an FD, a recurring deposit, or money market instruments, basically any financial option giving you access to your money quickly. These are risk-free and may not earn any returns.
Investing: You can invest in shares mutual funds, gold, real estate etc. any financial option that gives you better returns than savings and the returns beat inflation. These returns come with risk. Higher the risk, higher will be the returns.
2. Time horizon
Savings are usually for a short-term period while investments are from intermediate to or long term. In the short term, returns from investments fluctuate. In the long term, though, investments provide much better returns than savings.
Liquidity means the ease with which you can access your money without losing much value.
Savings are more liquid than investments because you can easily withdraw your money from a savings account but with investments it takes a few days or even few years.
For example, redeeming your investment in stocks and mutual funds for cash can take at least two days, and the redeemed value will depend on the prevailing market situation, selling real estate or property might take from a few days to even a few years and even FD’s have a maturity of 10-15 years. On the other hand withdrawing money from a savings account can take a few minutes.
Before saving you should keep these points in mind:
1.) Invest your money after you have met all your expenses and have left some cash for emergencies.
2.) Before investing determine how much risk you can take and then select an investment option depending on that.
3.) Research should be done before investing anywhere. Its really important to find the right mutual fund, stocks, and property to invest in. If you are unsure about the right stocks or funds, go for blue-chip funds that involve large companies in operation for a number of years. The best way, of course, is to read up on the matter and consult experts who are well informed and trustworthy.
4.) Nowadays with so many investment options one still invests their money in bank deposits like FD’s. Though these provide secure returns over time there are other alternatives too like SIP Mutual Funds that provide better returns at a small risk. Other safer options are government securities like bonds or public provident fund (PPF).
Saving and investing serve different purposes and follow different timelines. They both are equally important for financial security. Save some and invest some should be your motto for a financially stable life. If you still have any more questions on this, comment and let us know.