Explain the Difference Between Saving and Investing
Taking you towards the journey of financial independence, let see what are the differences and similarities between saving and investing. In addition, we will also learn how a disciplined investor creates a balance between the two.
Saving is an act of parking hard cash in tremendously safe and liquid securities. The main purpose should be capital preservation and the secondary should be getting some returns, if possible. This can take into account savings accounts and certificates of deposits among others.
Investing is a process of utilizing money/capital to produce a safe and acceptable return over a time-period. An investment can include stocks, mutual funds, gold coins, real estate, and small businesses to name a few.
This is how we differentiate between savings and investment:-
Four Main Differences Between Saving and Investing
Similarities Between Saving and Investing
Apart from differences, saving and investing do share one common goal: they’re both financial strategies that help allocate and assemble money.
“Above all, both involve putting money away for future purposes,”
Both the strategies employ specialized accounts with a financial institution to gather money. For savers, that implies opening an account at a bank, like HDFC Bank, Citibank, or credit union. For investors, that implies opening an account with an independent broker, though now many banks offer a brokerage arm, too.
Savers and investors both also recognize the significance of having money saved. Investors should have enough funds in a bank account in order to cover emergency expenses and other unforeseen costs ahead of a tie-up with a huge chunk of change in long-term investments.
Which is Better? Saving or Investing?
The correct choice between saving or investing is dependent on one’s financial position, risk tolerance, and financial goals. But, you can consider given below two rules:
If you require the money shortly, say within a year or so, or you seek to create an emergency fund, you might take into account a savings account.
If you wish to grow your wealth over the long term, then you might want to consider investing.
Let’s understand this using a real-life example*.
Alex can save Rs. 10,000 each month. She is confused if she should keep this amount in a savings bank account or invest in mutual funds. So, for this reason, we would be required to assess and compare the wealth creation capacity of the savings options vs mutual fund investments to have better clarity.
Importance of Investing
Investments have the key to one’s future as they essentially support in realizing your dreams. Following are some of the major advantages of investing:
Knock Down Inflation: Investing your money enables you to beat inflation over a period of time. If you don’t invest, chances are your purchasing power will decrease as inflation is inclined to eat away the value of money over the time period. To insure yourself against this circumstance, it is sensible to invest your money in investment avenues which bear the potential to yield inflation-beating returns.
Realize Your Financial Goals: Whether it’s purchasing a car or a house, or saving up for marriage, or paying for a child's higher education, or planning for retirement, investing can help you to fulfill all such financial goals. Investing your money is one of the ideal means to accomplish your long-term goals.
Earning higher returns Investment avenues such as stocks or mutual funds have the potential to fetch higher returns than savings accounts or fixed deposits.
The following table shows the difference between elss and mutual fund ways of investing.
Difference Between ELSS and SIP
FAQs on Difference Between Savings and Investment
1. What is the primary difference between saving and investing?
The main difference lies in the goal and the level of risk involved. Saving is the act of setting aside money in a safe, low-risk account for short-term needs or emergencies. Investing is using your money to buy assets, like stocks or mutual funds, with the aim of achieving long-term growth, which involves higher risk but also the potential for greater returns.
2. Can you explain saving with a simple, real-world example?
Of course. Imagine you want to buy a new phone in six months that costs ₹10,000. You decide to put aside ₹1,700 every month in a bank savings account. This is saving. Your money is safe, easily accessible, and you are accumulating it for a specific, short-term goal. The money won't grow much, but it will be there when you need it.
3. What does it actually mean to 'invest' money?
To invest means to put your money to work to generate more money, a process often called wealth creation. Instead of just storing it, you are buying an asset that you believe will increase in value over time. For example, buying shares in a company makes you a part-owner, and if the company does well, the value of your shares can grow.
4. What are some common examples of saving and investing options?
They fall into different categories based on risk and purpose.
- Common Saving Options: Regular Savings Account in a bank, Fixed Deposits (FDs), and Recurring Deposits (RDs). These are all very low-risk.
- Common Investing Options: Stocks (equity), Mutual Funds, Bonds, and Real Estate. These carry varying levels of risk and are meant for long-term growth.
5. Which is better for my future: saving or investing?
Neither is inherently 'better'; they serve different, equally important purposes. Saving is crucial for short-term goals (like a vacation in one year) and for building an emergency fund. Investing is essential for long-term goals (like funding higher education or retirement in 10+ years) because it helps your money grow faster than inflation. A healthy financial plan requires a balance of both.
6. How does risk separate investing from saving?
Risk is the fundamental difference. With saving, your principal amount (the money you put in) is almost completely safe and protected. When you invest, you accept the risk of loss, meaning the value of your investment could fall below what you initially paid. This risk is taken on in exchange for the potential for higher returns than savings can offer.
7. Why is it important to do both, not just save money?
If you only save, your money loses purchasing power over time due to inflation. For example, the ₹100 you save today might only buy ₹95 worth of goods in a year. Investing gives your money a chance to grow at a rate higher than inflation, helping you build real wealth for major life goals that savings alone likely cannot cover.
8. As a beginner, how should I think about splitting my money between saving and investing?
A great starting point is to first build an emergency fund in a savings account. This fund should cover 3 to 6 months of your essential living expenses. Once that safety net is in place, you can start directing a portion of your money towards long-term investments that match your financial goals and risk tolerance.
