Saving and Investing are absolutely important for every person who has any intention of creating wealth. To some, it might all look the same, but there are subtle differences that make all the difference. They can be used in various ways to meet expenses but it must be understood that there are some major differences between the two.
Economists and bankers always advise that ‘savings’ as a habit has to be learned at a very young age; this essentially teaches the value of money in a small way and helps to understand macroeconomics at a later stage.
Saving VS Investing
Saving money and investing money are two completely different concepts altogether; savings is part of the money left over after monthly or annual bills and expenses have been met or keeping aside a certain portion of the income.
Savings are generally used to deal with unexpected expenditure like an illness or unforeseen accident, home repairs, educational expenses etc. It can be a pre-fixed percentage of total earnings like 10 percent or 20 percent.
In other words, savings is hard cash ‘saved’ from expenditure by being cautious or avoiding an expenditure altogether. Investments, on the other hand, pertain to that certain sum of money put aside in financial products or systems to generate returns and increase incomes.
What makes Savings and Investments Different?
The three prime factors where savings and investments differ are:
- Time – savings usually cater to short-term needs, unlike investments that need longer durations of time from a few months to a few years to generate returns.
- Liquidity – savings are the most liquid of assets as they are accessible at any time. Investments, however, cannot (or should not) be liquidated immediately and may take a few days or a few weeks to attain liquid status.
- Risk and reward – the risk factor with regard to savings is almost negligible but do not see much return as compared to investments, which may be fraught with risks. But investments that are done wisely – for e.g. gold investing, mutual funds, shares and stocks etc. – can help fetch manifold returns over a period of time.
Managing your Savings
That said, we find that many a time when savings are easily accessible, the tendency is to dip into them and take money when the need arises – a celebration dinner or graduation party, automobile repairs, a sudden trip etc.
Financial planners are of the view that those who set aside a portion of their monthly income aside before chalking out expenses are better able to meet unforeseen expenses because they are able to build savings and reduce debts.
To help prevent depletion of savings funds, the best strategy is to set up an automatic transfer to a savings or investment account that has a lock-in period which makes it rather difficult to liquidate the money even if a need arises.
The two essential strategies to boost savings and investments are: (I) increasing income and (ii) reducing expenditure.