Comparing savings and investments is like comparing apples and oranges. While they are both fruitful to your financial wellbeing, they are both very different concepts. Despite this, the two terms are often used interchangeably.
This can lead to a lot of confusion, especially for those who have just started earning and are thinking about accumulating funds for their future goals. Keeping this in mind, the following article will pit saving vs investing head-to-head to see how they compare to each other and the different financial goals they can fulfil. Let’s go!
What is saving and investing?
Saving money usually refers to a simple form of wealth accumulation, such as putting away money in a bank account or a fixed deposit. On the other hand, investing refers to the purchase of certain assets such as stocks, gold, land and so on in the hope that they will appreciate over time.
What is the difference between savings and investments?
Saving and investing are quite similar because they both help you achieve a comfortable financial future. Therefore, it is equally important that you do both. However, they are not the same.
Let’s look at some key points of difference between these two financial concepts to understand when it is best to save and when it is best to invest.
• Risk & return:
This is perhaps the most significant difference between saving and investing. Investments are subject to market risks. Hence, generally Investments may result in burgeoning returns over the long term, but also carry higher risk and volatility especially in the short term,. On the other hand, savings instruments usually offer lower yet predictable or guaranteed returns and are thus considered safer than investments.
• Objective:
Investments are usually geared for long-term goals such as your retirement, the purchase of a house or to cover the cost of your child’s education. Savings can also serve these objectives. However, since they offer conservative returns, it would take much longer to build the corpus of funds required to meet these goals. Therefore, savings are better suited for short-term financial goals, such as your daily and monthly needs. A secondary objective of savings is to ensure you are financially prepared for financial emergencies as well.
• Protection against inflation:
Since savings instruments usually offer lower levels of returns, they do not offer much protection against inflation. On the other hand, investments offer much higher returns and can help you effectively combat inflation especially from a long-term perspective.
• Liquidity:
Investments such as gold and land offer lower levels of liquidity. Other investment instruments such as mutual funds while liquid may entail penal charges if you liquidate them before a predefined / maturity date. Savings, on the other hand, are usually highly liquid instruments. That’s why they are better suited for short term financial goals and financial emergencies.
Investing vs saving, which is better?
Is investing better than saving, which is more important, should I start saving first or should I invest my money instead – these questions can seem really confusing, but the answer is simple. Both savings and investing are equally important, and you need to do both if you want to secure your financial future. Doing one without the other could lead an imbalance in your personal finances.
You also need to remember that neither investing nor saving is better in all given circumstances. The right choice between the two ultimately depends on your current financial situation. If you need funds for short-term goals, you should start saving. However, if you need funds for long-term goals, it is better to start investing. And balancing both can help you successfully achieve your short and long term financial goals.