What Is The Difference Between Saving And Investing?
Savings has been a healthy habit since time immemorial. It is not just about money. It is about everything. All the saving you do is principally for meeting short-term goals and once the corpus of the savings that you make reaches the targeted amount, it is spent on the item you were saving for. Buying a mobile phone, a motorcycle or car, are some of the short-term goals. But to achieve a long-term goals like financing your child’s education, or buying a home, you need a sound investment plan.
The difference between saving and investing is that investing is a process that allows you to gain more money than you had before by putting money in financial schemes whereas savings are simply the surplus cash you have left after subtracting all your expenses from your income. Although investing has the drawback of higher risks as compared to savings, investing the right way can help you achieve higher returns and minimize your risks.
What Is The Difference Between Saving And Investing Money?
Investments are like advanced savings that actually create wealth and grow much faster than savings. Mentioned below are some basic differences between saving money and investments:
1. Risks to your investment portfolio
2. Returns on your investment
3. Tenure of your investment
4. Availability of cash
Now let’s look at these points in greater detail:
Risks to your investment portfolio
Savings are risk-free as long as your funds are in a recognized and government authorized bank, whereas investments like equities and mutual funds although being regulated by institutions like the Securities and Exchange Board of India (SEBI) tend to have a certain inherent risk.
Returns on your investment
Savings earn a maximum of 7% annual interest, i.e. if they are in FDs, whereas investments earn significantly better than that, depending on the instrument invested in. Well diversified mutual funds offer more than 3 times the returns of traditional savings instruments.
Tenure of your investment
Savings are short-termed, ranging from one to three years, such as FDs or the balances in your savings accounts. All investments with tenure less than three years may be classified as savings as they are essential to fulfilling short-term goals whereas investments are for long-term goals such as children’s higher education and your retirement planning.
Availability of cash
You have easy access to your savings giving you flexibility. However, depending on the type of instrument you use to invest, liquidity may or may not be available. For example, Equity-Linked Savings Schemes (ELSS) have a lock-in period of three years before you may withdraw the funds. Similarly, pension schemes such as Public Provident Fund (PPF) has a 15-year lock-in period while National Pension System (NPS) continues until you reach retirement age. Although open-ended mutual funds give you liquidity, most investments have a lock-in period making it difficult to access funds in case of need.
Why You Should Have A Financial Plan?
A financial plan is essential for you once you have a stable source of income and want to start planning for your future. A financial plan takes into account how much money you earn, where you spend it, what your future goals are, etc. and then create a plan using which you can achieve those dream easily. However, prioritizing savings and investments above expenses tends to be an extremely difficult task as you, like everybody else, have fixed expenses, which are on top of your priority list, but cannot take precedence over tax payments.
Your financial planning should account for the below-detailed steps preferably in the same sequence:
1. Investing in Tax Planning Funds
2. Saving For Short Term Goals And A Contingency Fund
3. Investing For Long Term Goals And Retirement
Let’s look at these points in more detail:
Investing In Tax Planning Mutual Funds
With the income tax exemptions as per Section 80C of the Income Tax Act, tax planning funds offer the best option for you to save tax on your investment with up to Rs. 1.5 lakhs in tax deductions. Figure out how much your taxable income is and if you should invest in other types of tax saving instruments to get the maximum benefit. Having accounted for your tax payments and related investments, you would want to take care of your fixed expenses and then move on to savings.
Saving For Short Term Goals And A Contingency Fund
These savings are like a parachute or a rainy-day kitty, which you set aside in case of emergencies. Contingency funds are very important to keep your financial plan on track while still being able to carrying out your daily life in-case of a crisis situation. A contingency fund also helps you to avoid taking on debt by providing you cash on hand to meet your financial needs in an emergency. Other than that, you can also invest for your short term goals such as buying a laptop or getting a bike.
Investing For Long Term Goals And Retirement
When you are saving money, you start by setting aside small amounts and very quickly gather the targeted amounts needed for goals. However, saving to make the down payment on your dream house requires a bigger amount, which may take a longer time to accumulate. This is where investments come to your rescue. Savings is like the seed you sow and investing is the nourishment you give to it and the shoot thereafter. The savings you set aside for meeting long-term financial goals may be put to work whereby you accumulate more money through investments in short-term mutual funds or fixed deposits (FDs) if the timelines permit.
You can use ARQ, our proprietary investment search engine to do your financial planning. As a key highlight of our Angel Bee mobile app, ARQ does the required research and analysis to enable you to choose the right investment instrument that aptly fulfils your needs. ARQ gives you simplified reports free of human bias after carrying out a thorough and detailed analysis of the investment instruments, and thus enables you to make informed decisions.