Understanding the differences between savings and investments
You need two things to live a financially secure life – savings and investments. Financial security is simply the peace of mind you feel when you can bear planned and unplanned expenses and don’t have to worry about money. Quite simply, financial security means having adequate control over your money. Saving and investing are two tools that can help you attain financial security. Let’s understand the meaning of savings and investments and how they are different.
What are savings?
The act of not spending money and setting it aside for future expenses and emergencies is known as saving. It is the money you should be able to access at any given moment, with little to no risk and with the least amounts paid in taxes.
What are investments?
Investing your money means to buy assets with the expectation of achieving capital appreciation and long-term goals. Investments typically attract capital gains and are categorised into two types – income investments and growth investments.
Difference between savings and investments
Many people use the term ‘savings and investments’ as a whole or interchangeably, not realising the two to be different. Indeed there are several differences between savings and investments. Let’s examine them:
- The period
A savings plan helps you meet your smaller financial objectives and goals you hope to achieve in the 1-3 years’ time frame. For instance, you may want to go for a vacation or buy a high-end product or appliance. To this end, you put aside a sum regularly until you can afford the product. Conversely, an investment is something that helps you achieve your long-term financial goals (e.g. 5+ years in future), for instance, paying for your children’s higher education or marriage or creating a retirement corpus.
- The products and returns
Savings products are typically offered by financial institutions like banks, for instance, Savings Accounts, Recurring Deposits, Tax-Saving Fixed Deposits, etc. These products enable saving money, and you can earn nominal returns in the form of interest. On the other hand, investment products include stocks, bonds, Mutual Funds, real estate, etc. Research-backed investments in these products enable you to earn inflation-adjusted returns, which can be much higher than the interest earned on savings.
- The risk factor
Typically, savings products are deemed less risky. You can open Savings Accounts and deposits with reputed banks that provide a reasonable interest rate. The interest rate typically depends on the investment tenure, but you may have to pay penalties for premature withdrawals. Market investments, on the other hand, are inherently risky, so you must consider your risk appetite before investing. For instance, debt securities are less risky than equity securities, which can be highly volatile.
When it comes to financial planning, it is critical that you understand the differences between savings and investments. You should have enough funds to pay for unexpected expenses and ensure you consider inflation and rising costs when your income sources begin to diminish. Proper savings and investments can help you lead a financially secure life.
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*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.