Saving and investing should begin right from the time one starts earning. Many confuse savings with investing. However, both are very different. When one saves money, they set aside some amount for emergencies or future use. They do not earn any return in savings. Whereas, when one invests money, they earn some return to fulfil their goals. This article covers savings, investments, and the difference between saving vs investment.
What is Savings?
Saving is setting aside some money for future expenses or needs. It is the first and foremost step towards leading a financially disciplined life. The savings fund comes as a boon during rainy days. A savings account or bank fixed deposits are some of the popular savings options in India. It is similar to holding cash. Our parents and grandparents have strongly believed in saving money for their children’s future to give them a comfortable life. That’s what kept them going and never touched their savings until and unless it was extremely necessary. While now most of us love to spend the money we earn and follow the ‘YOLO’ trend. Yes, You Only Live Once (YOLO). However, living without any financial hiccups should be the goal.
Indulging in a shopping spree or overshooting a monthly budget is not wrong once in a while. However, being financially disciplined by strictly setting aside some money for unforeseen situations is wise. Ideally, saving up to 20% to 35% per month is advisable. Having an emergency fund worth 3-12 months expenses is the best strategy forward.
The primary focus of creating a savings fund should be to meet certain specific goals that you plan to achieve soon. Or make yourself less vulnerable in case of financial emergencies. Or saving for a purchase that requires a large lump sum outflow.
Just saving all the money you earn does not make you a fortune. Saving is merely the difference between income and expense. While investing is allocating part of the savings towards assets to create long term wealth. It would help if you strategically coupled your savings with investments to be able to generate significant returns.
What is Investing?
Investing means buying assets with an anticipation that they will earn significant returns over time and ultimately growing wealth. However, most investments come with risk. It is often said that the higher the risk the higher the returns will be. The best investments have a margin of safety, which is frequently in the form of assets. Stocks, bonds, real estate, and mutual funds are some of the popular investment options.
The majority of our parents have seen real estate and gold as the popular investment option during their days. These investments require higher capital. In other words, these investments require a large lump sum amount. They have tirelessly worked and saved money to accumulate wealth to buy gold or real estate.
But now, with as little as INR 500, one can start their investment journey with just a couple of clicks from the comfort of their house. Investing towards goals will help in maintaining financial discipline and also effortlessly achieve the goals.
With a variety of investment products now available, there is an investment product that suits every investor. Be a risk-averse investor or a high-risk taker, and there are options for all. All that you have to do is identify your goal, assess the asset, and make sure it fits your investment objective.
Investing is a long term process that requires patience and good due diligence of the investment products. Equity and equity-related investments are highly volatile investments and hence require a long term investment horizon to be able to average out the shortcoming from the market. On the other hand, debt investments are more suitable for risk-averse investors and are good alternatives to traditional investment options offered by banks.
Difference Between Investment and Savings
Following are the differences between investment and savings:
|Basis of Difference
|Putting money in financial products or assets with an expectation to earn profits in the future.
|Money is set aside after meeting all the expenses to meet unforeseen expenses.
|Low or Zero Risk
|Wealth creation and capital appreciation.
|Suitable for a rainy day or unforeseen events.
|Low liquidity in comparison to a savings fund.
|Highly liquid, equivalent to holding cash.
|Long term, five years or more.
|Low returns in the form of interest.
|Type of Asset
|Long term asset. Suitable for goals such as a child’s education, marriage, buying a house, etc.
|Short term asset. Suitable for short term goals such as buying furniture, home appliances, or meeting emergency requirements.
|Stocks, Bonds, Mutual Funds, Gold, Real Estate, etc.
|Savings account, Certificate of deposits, money market instruments, etc.
|Protection against Inflation
|Good protection against inflation.
|Only a little.
|Time consuming to understand, invest and keep track of investments.
Why is Investing So Important?
Through investing, one can secure their financial future and realize their dreams. Following are a few benefits of investing that highlight why investing is important.
Through investing, one can earn higher returns than saving. There are different investment vehicles that can fetch investors high returns in favourable market conditions. By investing, one can make their money work for them.
Reach financial goals
Through investing, one can accumulate wealth. This will help them fulfil their financial goals and also secure their future. Investing with a goal in mind will not only motivate investors to invest regularly but also help in achieving the goal.
Inflation has the power to eat up one’s savings and reduce their purchasing power. In other words, the worth of one rupee will be less than what it is after a year. This is mainly due to inflation. To beat the rising costs, one has to ensure their money grows. This can only happen through investing.
The market has so many investment routes, and one of them is systematic investing. By investing regularly, one doesn’t just fulfil their goals, and they are also inculcating a practice. One will be financially disciplined by investing regularly. Moreover, it will also help them keep a check on their expenses.
When Should You Move from Saving to Investment?
Having some cash handy for a rainy day is a necessity. However, how much money can one hold at the bank or in cash lying idle without earning any return from it? At some point, when the cash is in surplus, one should start diverting their savings to invest and earn some return for fulfilling future financial goals.
Investing is very subjective to each individual. Each one has their own set of goals and objectives to fulfil in their life. Hence each of them has different timelines with respect to savings and investment. There is no guide for investing that mentions the right age or time to start investing. However, one can ask themselves a few questions to know whether they are ready to start their investing journey or not.
Do I have an emergency fund to cover my expenses in uncertain times?
Having an emergency fund is the first step towards starting the investing journey. The emergency fund will help cover all the expenses in times of any emergency, like loss of a job or any family member falling sick. The emergency fund should have at least 3-12 months of expenses.
A family with more than one earning member with high job security can have only three months of expenses as an emergency fund. But a person who is the main breadwinner of the family with low job security should have at least 6-12 months of expenses as an emergency fund.
If you have an emergency fund in place, then you are ready for your investing journey.
Can I commit to investing for a period of 3-5 years or longer?
Financial goals can be both short term and long term. Immediate financial goals that are to be realized in the next one year or two need not require a financial commitment. However, financial goals with a longer investment horizon, like five years or more, require investors to stay invested.
Few investments have a mandatory lock in period, and investors do not have any other option apart from staying invested. However, some investments do not have a lock-in, but to fulfil their financial goals, investors are required to commit for longer durations.
If you can commit your money for longer durations to fulfil your financial goals, then you can consider starting your investing journey.
Will I stay invested, even in highly volatile market conditions?
Any financial advisor will ask a few questions to understand how an investor will react to market risk. The investor will either be patient enough to give some time for the market to settle down or react immediately and take action. When an investor reacts to market movements (small or big) and pulls out the money from the investment, then the investor has a low understanding of risk. However, if the investor is patient enough to let the investment portfolio weather out the ups and downs of the market, then they have a high understanding of risk.
One has to understand that every investment comes with risk, either high or low. The financial market has an abundance of investment products catering to different types of investor needs. There are financial products with low and high market risks. Investors have to choose the investment option that will best suit them.
If you are ready to take in some risk to earn some return, then consider yourself ready for investing. Here are a few tips to avoid bad investments.
How Much Should You Save and Invest?
There’s no definite rule of thumb as to how much one should save and invest. Saving and investing can go on simultaneously. One need not wait to complete a savings goal before starting their investments.
Ideally, financial experts advise that 10% of the income should go for savings. However, based on your expenses, one can save more or less. When it comes to investing, 10%-15% of the income can be invested in multiple investment vehicles.
One can start saving and investing right from their first paycheck. Always prepare a budget and decide on the amount of expenses. Always stick to the budget and do not overspend. Then decide on the amount of savings based on the expenses.
While investing, take the help of a certified financial advisor or planner and choose the right investment. Automate the investments to ensure financial discipline. Invest for the long term to reap maximum benefits from the investments. Moreover, increase the amount of investment as the income increases to beat inflation. The earlier one starts their investing journey, the larger will the corpus they will be able to accumulate in the long term.
It is important to note that one should start investing only when there are enough savings for emergencies and rainy days.
Happy Saving and Investing!