Savings and investments are two fundamental financial terms often used interchangeably. However, there are stark differences between two that can not only help you manage your finances but also achieve your financial goals.
Let’s understand the differences
What Are Savings – The Definition
Saving is referred to as that part of income that is not used for consumption, it is the act of keeping aside money that is required for later use.
In other words, savings can be defined as an amount that is left after meeting all the expenses from the disposable income of a person.
What is Investment – The Definition
Investment is the process of buying an asset that is acquired with the purpose of generating income over a long period of time. It is done with saving to generate wealth and returns (or get greater returns).
The main purpose of investing is to create capital appreciation and investment can be done through instruments such as bonds, stocks, mutual funds, etc.
Here’s a closer look:
Understanding The Basic Differences
| Savings | Investing | |
| Definition | Reserving parts of income for situations in need | Money put into financial instruments to achieve growth in its value over time. |
| Goal | Achieve specific short-term goals like emergencies, vacation | Multiply money by generating substantial returns. Can be further reinvested. |
| Liquidity | High. Can be easily accessed. | Low. Can be accessed mostly after the investment tenure |
| Risk & Returns | Low risk, low returns | High risk, high returns |
When to Choose Savings?
Savings are typically targeted at short-term goals. Savings come in handy in times of financial contingencies such as job loss or an uncalled for medical emergency. Considering such incidents, one should focus on saving. When you save, you mostly park funds in a savings bank account, which is extremely liquid. This means that you can withdraw funds from the bank account whenever you feel like.
You should choose savings over investments for your short-term goals. For example, if you want to buy an expensive smartphone in the next 6 months, you should save. You cannot invest for a short-term goal because investments typically lock your funds for more than a year.
When to Choose Investing?
When you want to achieve a long-term goal like buying a house, funding your child’s higher education and their marriage or planning for your retirement, investments is the answer.
For example, an MBA degree costs upwards of ₹20 lakhs in India today. Hence, you should start investing for your children’s education the moment they are born. You should also prioritise investing over savings when you are young. If you start investing even small amounts in your 20s or 30s, they will accumulate to become a sizable fund by the time you are in your 60s or 70s due to the power of compounding.
Striking the Right Balance Between
Any financial portfolio should have both the components. The best one is the right balance between savings and investing. Unfortunately, many of us struggle to manage this. One should consider saving up to a point when one has around 3 to 6 months of your salary in a savings bank account. This will provide you with a buffer against unexpected financial obligations.
On the other hand, if you have successfully accumulated money to last you at least 12 months or more, then you should immediately consider parking at least 20 percent of the amount in investment tools such as mutual funds or bonds. This way you will be able to multiply the money and eventually generate wealth.
Wrapping Up
Savings and investing are complementary strategies that, when used together, can help investors grow their wealth safely. By building a foundation of savings, paying off high-interest debt, and wisely investing in assets that matches one’s financial goals, one can chart a clear path to financial prosperity. Remember that the key to financial success is patience, discipline, and continuous learning.
By Sampurna Majumdar
Sampurna Majumder is a communications professional born and raised in Kolkata. Fascinated by creativity from a young age, she has a deep love for music, literature, and world cinema. An avid reader and traveler, she holds a Master’s degree in Literature from the University of Delhi.
