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Difference between savings and investing 

By the Paise Sherpa

The terms ‘saving’ and ‘investments’ are often used alternatively, but what they really mean is vastly different in many ways. Understanding the difference between savings and investments is the first step towards financial literacy. So, what do these terms mean exactly? Are Savings and Investments the same? 

Savings

Saving is the money that we put aside, often gradually, so that it is readily available when needed. Growth of the money is not the purpose of saving. The money is kept aside not for it to grow, but for a certain short-term need.

This short-term financial goal could be buying a car, down payment of a loan, security deposit for a rental space, an emergency corpus, or even the expenses for the next few months. The money saved is highly “liquid” – it is easily and immediately accessible. Generally, savings are parked in liquid financial instruments like bank saving accounts, short term FDs, etc. where there is little or no financial risk of the saved money being wiped out and where the money is accessible immediately.

One of the downsides to such savings is that it often reduces the “value of the money saved” or “the purchasing power of the money saved” as the interest earned might not exceed the rate of inflation; which means that the actual value of the savings might reduce if the inflation is high. However, as we have said before, the purpose of saving is not to grow the corpus but to have a pool of easily accessible money.  

 

Investments 

An investment is when you keep your money in financial instruments with the goal to help it grow. Investments are generally done in bullion (gold, silver, etc.), equity instruments like shares, mutual funds, etc., real estate, debt instruments like bonds, debentures, Fixed Deposits, etc. It is debatable whether real estate (meaning real estate not for own consumption but for rental/lease purpose) is a sound investment. Generally, the residential rental yield in India is less than 2% (or lower in case of metros) and does not justify the inflated real estate valuations. Also, real estate is highly ill-liquid and the asset appreciation might not be as high as an equity based investment.

Purpose of an investment is to increase the corpus over a period. Also, investments have certain pre-defined short term (buying a car, child’s education, annual vacations, etc.) and long-term goals (retirement corpus, child’s marriage, etc.). Generally, these instruments tend to be for a mid to long term duration as the real growth and the magic of compounding starts to kick in after a few years of consistent investing. Investments also constitute a certain risk and requires a sound knowledge of various financial instruments, regulatory and taxation rules, economic micro and macro trends. Hence  investment is best done by professionals like a wealth managers.

Discipline, commitment and consistency is required for a sound investment portfolio that meets your different financial goals (setting these goals as early as possible is crucial). Also avoiding emotional decisions is also important.

One has to save in order to invest money to earn returns; but not the other way round.

So, are you saving for your short term needs and investments?


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