People are often confused between investment and savings, especially in countries like India, Pakistan,
and other developing nations where people think investments are savings and vice versa.
But! these both terms are very much different from each other.
Both, are important models to build the financial foundation, both savings and investment are practices to build financial wealth.
Based on certain parameters both investment and savings can be differentiated, let’s study these parameters exclusively.
Remember, there is no Superior or inferior between these two models, both are equally important in different financial phases.
it will be advisable to follow both practices to build stable financial wealth.
What is Investment?
In investment shares or securities are purchased with the hope that they will generate income in the future.
Investments are basically the acquisition of assets, shares, and securities which will generate greater wealth for investors.
Investment works on principles of “money will generate money”.
what is savings?
Savings are the preservation of specific amount of money from income.
Savings are basically income that is purposely not spent by an individual.
Savings & Investing Explained
Even though we see savings and investment as security for the future but! both have motives and goals are very different.
Savings are often considered for a short period and have the motive to buy luxuries goods and services, like holidays, new cars, and other luxuries items.
Mostly main motive of savings is to enjoy a quality life.
But! savings are sometimes used to generate wealth also.
it may be used for long-term goals also, due to very less volatility and risk, savings very well help individuals during market crisis.
Savings provide stability in individuals’ portfolios as well as the opportunity to enjoy a quality life.
Investing is often considered as a method of generating wealth in long term, it is observed that investing in the long term gives individuals very high returns.
The stock market, Mutual funds, Bonds, Gold, Government schemes are the various methods by which individual can invest their money.
Investing provides high returns with moderate risk.
investing is important because it will protect investors against inflation, it is recommended by experts that individuals should invest 20% of their salary, to sustain against inflation.
Motive ; Buy luxuries goods & services and enjoy a quality life or for generating wealth.
Risk ; None or very low.
Returns ; Relatively low.
volatility ; None or very low.
Services ; Bank’s Savings account, FD (Fixed Deposit), and RD (Recurring Deposit).
Time period ; Short
Protection against inflation ; very little.
Liquidity ; High.
Security ; High.
Knowledge ; None or low, savings account can easily be handled by any individual without any particular knowledge or literacy.
Brokerage ; None.
Goals ; Short-term.
interest ; Generally, all savings schemes interest comes under 2% to 7%, for all types of accounts.
Motive ; Generating very wealthy returns over the long term for the future.
Risk ; low, moderate risk or Varies by investment
Returns ; Moderate or high.
volatility ; low, moderate, or Varies by investment, Stocks are relatively high volatile compared to bonds and government schemes.
Services ; Stock Market, Mutual funds,Bonds, Government Schemes like a post office, PPF, National Pension Scheme, etc.
Time period ; long, mostly 5 years or more
Protection against inflation ; potentially very high.
Liquidity ; Moderate, High or it takes days to get in form of cash.
Security ; High.
Knowledge ; Moderate or high, generally it required basic knowledge for investing in mutual funds and schemes, but! it is essential to get some knowledge before investing in stocks.
Brokerage ; Depend on investments.stocks and mutual funds generally charged some brokege
Goals ; Long-term or only for sake of the future.
interest ; Government schemes provide fixed interest, generally announced quarterly or yearly, stocks and Mutual funds interest depend on the condition of the market.
The pros and cons of saving
- Savings can be used as emergency funds, due to high liquidity.
- With a proper saving plan, an individual can enjoy a quality life.
- with savings in banks, individuals can get money as cash very easily.
- Savings can be used in the stock market when the market is down, and the market shows potential to grow.
- Savings are generally easy and straightforward.
- Returns are very low, individuals can earn more returns through investing.
- Due to fewer returns, it is very hard to survive inflation.
- In the case of a savings account, individuals may face a penalty if the minimum amount was not maintained in the account.
The pros and cons of investing
- Investment has potential to create major wealth.
- With investment individuals easily survive the inflation.
- With proper investment plan indivudal can easily enjoy laxuarys as well as quality life.
- Investment can help future generation to survive future calamity.
- Individuals can start investment with very small amount with SIP.
- Investment required basic to very high financial knowledge or some expert.
- Investment are less liquid compared to savings.
- Some investment plans are riskier and volatile from others, e.g. Stock Market.
- Investment required larger time frame to generate potential wealth, individual may get fearfully in short term period.
- Brokrage are charged in some investment plans.