Savings vs Investment – Understanding the Differences to Grow Your Wealth

Savings and investment are two terms that are often used together when it comes to financial planning. In fact, many people use these terms synonymously. They are so closely linked that they might seem like two peas in a pod. But they play completely different roles in your financial plan.

So, what is the difference between saving and investment? Let’s break it down for you. 

What is saving? 

Saving refers to the money that you put aside for future use from your regular income. For example, say you earn a salary of Rs 1 lakh per month. Out of this, you pay rent for Rs 30,000, spend Rs 20,000 on groceries, and another Rs 10,000 on utilities. You also like to spend Rs 15,000 on non-essentials like dining out, watching movies, travelling, etc. You are left with Rs 25,000. You put this Rs 25,000 aside each month for future use. These are your monthly savings. 

The purpose of savings is to help you cover your future needs and unexpected expenses. Savings carry minimal risk.  

What is investing? 

Investing refers to putting your savings in an instrument that earns a return over time. There are various markets to choose from, each offering different types of securities like stocks, bonds, currencies, and commodities. Your money is put to work, and it earns returns depending on the performance of your chosen investment.

For example, imagine you invest Rs 25,000 in stocks. If the value of those stocks increases, you earn a notional profit. However, investing carries some risks and also comes with the potential for loss as the value of stocks can go down as well. 

Saving and investing – Differences

Here are some differences between saving and investment:

1. Products 

Savings involve secure options like storing cash at home, bank accounts, Recurring Deposits (RDs), and Fixed Deposits (FDs). These methods primarily focus on preserving money. While savings might offer some returns, they are typically low. 

Investments, on the other hand, include a variety of assets such as mutual funds, stocks, bonds, real estate, gold, Exchange-Traded Funds (ETFs), and commodities, among others. The returns on investments vary depending on the type of asset and market performance. For example, equities can deliver higher returns over time, while bonds and debt funds offer moderate but stable growth

2. Risk 

Savings products are generally considered risk-free. Bank accounts, RDs, and FDs are protected from market fluctuations. Even in cases where cash is stored at home, the main risk is theft rather than financial loss due to market volatility. Savings methods like FDs are particularly popular because they provide guaranteed returns with little to no risk involved. You can easily calculate the returns from a Fixed Deposit Calculator as well.

Investments, however, carry varying levels of risk depending on the asset. For instance, fixed-income instruments like bonds are safer, whereas equities, currencies, and commodities can be volatile. That said, taking a long-term approach to investing can help manage risks. 

3. Liquidity

Savings are known for their high liquidity. Money in a bank account is readily accessible, and you can withdraw it at any time without penalties. While RDs and FDs may have lock-in periods, they still offer some level of liquidity in emergencies, with minor penalties for early withdrawal. 

Investments can also be liquid, but this depends on the type of asset. For example, most mutual funds allow redemption anytime. However, some investments, like ELSS or Equity Linked Saving Schemes, come with mandatory lock-in periods of three years. Real estate, another popular investment, also lacks liquidity and may take months or years to sell your property. 

4. Growth 

Savings offer limited growth. The returns are generally low. Savings are ideal for short-term goals or emergency funds but not for building wealth over time. 

Investments have significant growth potential. For example, equities can provide high returns over the long term, while real estate often appreciates substantially. 

5. Inflation protection

Savings often struggle to keep up with inflation. As inflation rises, the purchasing power of your saved money decreases. For instance, if inflation is at 6% and your savings earn only 4%, you effectively lose 2%.

Investments, particularly in assets like equities, real estate, and gold, can provide a hedge against inflation. These asset classes can grow at a rate that outpaces inflation. This ensures that your wealth retains its value over the years. 

When to save and when to invest? 

Savings and investments should both be a part of your financial plan. Savings are essential for developing financial discipline and building healthy money habits. Regular savings ensure that you have funds available for immediate or unexpected needs. For instance, creating an emergency fund is a key reason to save. You can use it to cover unexpected expenses like medical emergencies or to cover your expenses in case of a job loss. 

Savings are also the foundation for your investments. The money you save can later be invested in different instruments and potentially grow your wealth. Savings do not really require a specific strategy. However, a good rule of thumb is to aim to save at least 10% to 20% of your monthly income. This ensures you consistently set aside money month-on-month without any misses.

Unlike saving, investing requires a more structured strategy. Investments help you achieve specific financial goals, such as retirement planning, buying a home, or funding a child’s education. Investments typically involve a long-term horizon and the potential for higher returns compared to savings. If you want to invest effectively, you need to start by identifying your financial goals. For example, if you are planning for retirement, you will need a long-term investment strategy that can bring high returns while riding out market risks over the years. Stocks, equity mutual funds, or retirement-focused instruments like the National Pension Scheme (NPS) can be suitable options.

Conclusion 

There is no clear winner in the debate between savings vs investment because both are equally important. While they offer different benefits and serve unique purposes, they can help you achieve your financial goals when used together. Savings provide security and liquidity for immediate needs, while investments help grow your wealth over time. Ideally, you must evaluate your needs and create a balanced approach that includes both saving and investing.