Difference Between Savings and Investment

Taking you towards the journey of financial independence, let see what are the differences and similarities between saving and investing. In addition, we will also learn how a disciplined investor creates a balance between the two.

Saving is an act of parking hard cash in tremendously safe and liquid securities. The main purpose should be capital preservation and the secondary should be getting some returns, if possible. This can take into account savings accounts and certificates of deposits among others.

Investing is a process of utilizing money/capital to produce a safe and acceptable return over a time-period. An investment can include stocks, mutual funds, gold coins, real estate, and small businesses to name a few.

This is how we differentiate between savings and investment:-

Four Main Differences Between Saving and Investing

Similarities Between Saving and Investing

Apart from differences, saving and investing do share one common goal: they’re both financial strategies that help allocate and assemble money.

“Above all, both involve putting money away for future purposes,”

Both the strategies employ specialized accounts with a financial institution to gather money. For savers, that implies opening an account at a bank, like HDFC Bank, Citibank, or credit union. For investors, that implies opening an account with an independent broker, though now many banks offer a brokerage arm, too.

Savers and investors both also recognize the significance of having money saved. Investors should have enough funds in a bank account in order to cover emergency expenses and other unforeseen costs ahead of a tie-up with a huge chunk of change in long-term investments.

Which is Better? Saving or Investing?

The correct choice between saving or investing is dependent on one’s financial position, risk tolerance, and financial goals. But, you can consider given below two rules:

If you require the money shortly, say within a year or so, or you seek to create an emergency fund, you might take into account a savings account.

If you wish to grow your wealth over the long term, then you might want to consider investing.

Let’s understand this using a real-life example*.

Alex can save Rs. 10,000 each month. She is confused if she should keep this amount in a savings bank account or invest in mutual funds. So, for this reason, we would be required to assess and compare the wealth creation capacity of the savings options vs mutual fund investments to have better clarity.

Importance of Investing

Investments have the key to one’s future as they essentially support in realizing your dreams. Following are some of the major advantages of investing:

• Knock Down Inflation: Investing your money enables you to beat inflation over a period of time. If you don’t invest, chances are your purchasing power will decrease as inflation is inclined to eat away the value of money over the time period. To insure yourself against this circumstance, it is sensible to invest your money in investment avenues which bear the potential to yield inflation-beating returns.

• Realize Your Financial Goals: Whether it’s purchasing a car or a house, or saving up for marriage, or paying for a child's higher education, or planning for retirement, investing can help you to fulfill all such financial goals. Investing your money is one of the ideal means to accomplish your long-term goals.

Earning higher returns Investment avenues such as stocks or mutual funds have the potential to fetch higher returns than savings accounts or fixed deposits.

The following table shows the difference between elss and mutual fund ways of investing.

Difference Between ELSS and SIP