Many investors, especially newbies don't understand that saving money and investing money are two different things. They serve different purposes and play different roles in your financial strategy. It is necessary to be clear with this fundamental concept before you begin your journey to building wealth. A couple of common questions people have is what is savings vs investment? When to invest, and when to save? The answer depends on what you have planned for the future—and what you want to do with your money. This article will take you through both the basics of savings and investments, the difference between savings and investments, and its benefits.
Saving money refers to keeping money that you don’t spend. This money is usually used to meet some specific financial goals you are hoping to accomplish soon, such as making yourself less financially vulnerable in case of emergencies or saving for a huge purchase you can’t afford to pay at once.
Investing refers to buying assets with the goal of earning more returns on your investment and, ultimately, growing your wealth. But, when you invest money, you generally take a bit of risk in exchange for a good return on your investments. Best investments are pegged by some margin of safety, often in the form of assets. The best investment assets are stocks, bonds, real estate, mutual funds, and others.
When you invest money either by purchasing mutual funds or by buying stocks or shares, your money ends up earning its own income. If the value of the stock or mutual fund increases, you can earn money if you sell the stock for a higher price.
Investing for a long period of time helps you to save taxes. If you are a trader, who buys and sells shares over a short period of time, you are taxed at 15.45% on your Short Term Capital Gains. Investing in equity for the long term like 12 months or more makes your Long Term Capitals Gains even more tax-efficient, as you’re taxed at 10% on gains above Rs. 100,000.
Compounding refers to reinvesting your profit, which in return gives a huge profit in the long run. Compounding on an investment done frequently creates a bigger corpus generating wealth, and the amount doubles in less time.
If you are a young investor by growing your investments over time you will be able to afford things that others can’t. Your personal finances will get tight at times throughout your life, and investing at a young age can help in those tight times.
Savings can be considered a box where people store their money, but not let them grow, whereas, investment is a kind of job, where your money works for you, grows for you and earns benefits for you. Below are a few parameters, based on which, Saving and Investments are differentiated:
It is always advised, to fix your goal, before defining the way to reach there. Similarly, when it comes to saving money or investing money, the very first thing you should analyze is your financial goal. Fixing a financial goal will help you choose the way to attain it.
Let me explain to you with an example, consider you are planning a trip to Shimla and the total trip cost is around Rs 50,000. You have 12 months to travel, even if you save every month around Rs 4200, you can easily accumulate Rs 50,000 in a year. On the other hand, if you are planning to buy a car worth Rs 10,00,000, then this is huge money, and you need to do an investment. Investing in mutual funds is always preferable, as they give good returns.
Savings are generally done to meet financial needs in a short duration likely from 1-3 years, whereas investments are done to meet bigger financial goals that require long-term capital appreciation. So, if you are planning for financial goals like, for a better-retired life, for your child’s marriage, education, which is due in about 5 or more years ahead from now, investments, from now will help you accumulate enough capital for your financial need, by the time it is required.
When it comes to risk, saving your money in a savings account or fixed deposits or through another way, are considered the safest investments, as they ensure a fixed amount, over a fixed period of time. On the other hand, whether it is investing in mutual funds or stock markets, or real estate, the returns are based on market fluctuations. Hence, is considered a bit risky.
Saving in savings accounts gives very less return around 3-4%, whereas fixed deposits give returns with a rate of returns around 7-9%. Whereas investing in Mutual funds, gives a good return on one’s investment, with a rate of returns around 10-15%. Sometimes when the market performs above the sky limit, you may get returns, on a rate of interest above 15%.
When you have an extra amount, you can save it for a rainy day, or invest it for the future. But savings vs investment, the choice is highly subjective. We all have goals that we would like to attain by a specific time in our lives, but what can we attain with a savings account that gives us little or nothing annually?
Though risky, investing has a higher potential for growth. When compared to a savings account, investing generates more income on your capital annually. Understanding the various types of investments and how they work is essential if you want to be successful when reaping your financial rewards. We all want our hard-earned money to work for us, and this simply means that we want to see our capital generate more money. Investing does just that.
Finding financial independence is vital because it can save you from a lot of heartache and stress. So what are you doing to secure yourself financially? Are you saving money or investing?