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Do you know the difference between saving and investing?

The difference is quite important and probably an existential question for those who are just beginning their investment journey.

I had an interesting conversation with a friend recently. She is relatively new to investing and wanted to better understand how it all works. However, when explaining about the why of investing, a curious question came up. 

“Is saving the same as investing?”

The difference is quite important and probably an existential question for those who are just beginning their investment journey. Saving and investing are quite different So, what is saving, essentially?

Saving is nothing but money you decide not to spend. The spending can be for anything that gets consumed or is used in your life. You can keep the money in your account or take it out and keep it as cash. There was a time when simply doing that was considered enough. In fact, we have all grown up seeing piggy banks or a jar with coins. Those coins in the jar are savings in the truest sense. You are just collecting from what you have earned and storing it somewhere.

Let’s talk investing

Investing is essentially about growth, generally at a specific rate for a specific purpose.

Technically speaking, money in the bank is also an investment, as you earn an interest on the sum. If your money grows, then you are investing. Normally, the vast majority of us start investing either accidentally, or it is done for us. 

Your EPF contribution isn’t done for the sake of saving tax. It’s actually meant to be a retirement fund of sorts. Your EPF money gets invested in government securities, bank FDs and company bonds. About 5% of the investments are in the stock market as well. 

The money is invested and earns a rate of return (current growth rate is slightly more than 8%). It’s a good example of an investment that is done for you. 

However, true investing is when you have a purpose (can be ill defined to begin with), a time frame for the purpose, and a growth expectation or requirement.

ULIPs and non-term life insurance policies, mostly endowments, are good examples of accidental investments. Many of us go for them to save taxes rather than to invest and grow our money.

However, true investing is when you have a purpose (can be ill defined to begin with), a time frame for the purpose, and a growth expectation or requirement.

Thus, if the purpose or goal is long term in nature then you choose investments that are apt for such a purpose, like stocks and shares of companies or investments that rely on stocks and shares.

If your purpose is short term, you choose fixed return investments like an FD or debt mutual funds. In either case, you are investing if you put your savings into investments that are aligned to a purpose.

This is why having a goal is so important. If you are just starting and have no clue what goal you should invest for, do this:

1. Invest something for the unknown – put away 4 months’ worth of your pay cheque in a stable investment like a liquid fund or an RD. Call it your emergency fund.

2. Invest something for the short term – again choose a liquid fund or a short duration fund. Use it for stuff like vacations.

3. Invest something for the long term – this can be for things you aren’t even thinking about yet like retirement. Choose a good equity mutual fund for this. A large cap fund or a diversified equity mutual fund would be a wise choice. You can start with an affordable sum like, Rs 1000 per month.

Know the difference. If becoming wealthy is on your agenda, don’t stop at saving, just start investing.

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