Why Saving Your Money Is the Fastest Way to Lose It All
And How Investing Can Catapult Your Wealth
When it comes to finances, and personal finance especially, it is advisable to correct some misperceptions.
Usually, "saving" and "investing" are terms that are used interchangeably; they are different concepts with distinct characteristics and objectives.
Savings refer to the portion of an individual's income that is set aside for future use. The amount could be set aside for specific ends or purposes– an emergency fund, education, or buying a house.
On the other hand, investment is when money is allocated to generate additional income or for capital appreciation.
Key Difference
A key difference between savings and investment is that savings are generally considered low-risk, low-return options. In contrast, investments are often associated with higher risk and the potential for higher returns.
For instance, deploying your money into a fixed deposit at a bank is a low-risk option, because the Deposit Insurance and Credit Guarantee Corporation guarantees the principal (up to Rs 5,00,000).
On the other hand, investing in bonds, stocks, commodities, and real estate carries more risk but also offers the potential for higher returns.
Another difference between savings and investment is that savings are typically more liquid, which can be easily accessed in an emergency.
These days, some investments can be quickly redeemed, but then you would have to sacrifice the expected returns over a longer term.
This is why it's essential to consider the liquidity of an investment before making a decision.
Savings are used to meet short-term goals, such as a down payment on a house or a vehicle, while investments are typically used for long-term financial planning, such as retirement.
That's why savings accounts may offer a lower interest rate, as the focus is on accessibility rather than earning a high return.
Focus on returns
On the other hand, investments are often chosen for their potential to grow over time, so the focus is on earning a higher return on investment.
Another difference between savings and investment is the level of control and management. Savings accounts are generally easy to manage, though some have a few options for customization like an auto-sweep facility.
Investments often require more research and monitoring to ensure they are performing as expected and need decisions to be made related to profit-taking or purchasing additional assets.
In real terms, savings can lead to wealth erosion because of inflation. If made prudently and based on sound advice, investments can beat inflation.
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