Difference between Savings and Investment
Is there a difference between Savings and Investments? Let us find out.
- Savings and investments are two sides of the same coin.
- Saving is the act of setting aside money in Bank Accounts and Deposits.
- To invest means to allocate assets in various market securities.
- While savings generate lower but safer returns, investments involve risks but can generate significantly higher returns.
- Savings help achieve short term goals, while investments can help you realise your long-term goals.
Financial planning is the key to life-long financial security. It involves several strategies, from budget planning and strategic asset allocation to determining financial goals and gradually building your wealth. But to take the first step towards financial planning, you need to create savings and invest in various instruments and investment products. Let us analyse the difference between savings and investments in this article.
What are Savings?
Savings can be defined as the act of not spending your money to fulfil every single impulsive want you have. Instead, it involves setting funds aside for emergencies and future expenses so that you can access it at a moment’s notice, whenever you need it. The most common way to create savings is to open a Savings Account in a bank and park away your idle money in it. The funds you park in a Savings Account typically do not involve any risks and earn you decent interest income.
What are Investments?
An investment is the act of buying assets with the intention of growing your capital and achieving capital appreciation. It involves clearly defining your financial goals over the short and long term and taking measures to achieve them. When you invest in something – be it real estate, equity funds, mutual funds, etc., you have to consider your risk tolerance. You should be open to the idea that while your investment may result in capital appreciation, it can also put your capital investment amount at risk.
Savings vs Investing – What Should You Do?
Let us now compare the differences between savings and investment.
Banks usually offer savings products. The most common products banks offer include Savings Accounts, Fixed Deposits, Recurring Deposits, and Tax-Saving Deposits. Conversely, investment products include various instruments in the financial market, including shares, stocks, bonds, mutual funds, etc.
The returns rate is a crucial point of comparison between savings and investments. While the former generates nominal and steady returns in the form of interest payment, the latter can generate a higher rate of returns resulting in actual gains. Investments can help you earn-inflation-adjusted returns, which can be significantly higher.
Savings products are generally less risky, keeping your capital amount secure. The bank returns the entire capital amount when your deposits mature. However, investments involve several risks such as market volatility, fluctuations, etc. You must, therefore, consider your risk tolerance before investing in any stock market instrument.
Saving money generally help you fulfil your short term goals. You can also create an emergency fund through savings. Investment products can help you achieve your long term goals like planning for your child’s education, buying a house, etc.
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In the debate of savings vs investment, there is no one clear winner. The path to wealth creation typically begins with savings. You can invest in the financial markets, create bank fixed deposits, buy real estate, etc. Just ensure you consider your financial goals and risk appetites and continue saving and investing simultaneously.
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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.