Difference Between Savings and Investment

Difference Between Savings and Investment
Most people, especially the new investors, use savings and investing interchangeably. But, they are entirely different things, carrying different purposes and playing different roles in your financial strategy and your balance sheet. Before you begin your journey to building wealth and financial independence, make sure you are clear on this fundamental concept.

What is saving?

Saving is the process of putting money aside for a future expense or need by parking it in bank accounts. The saved money is available relatively immediately when you need it, for purchases and emergencies, and it is extremely low-risk and highly liquid.

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What is investing?

Investing money is the process of using your money to buy assets that value over time and provide high
returns in exchange for taking on more risk. Investments are typically volatile and illiquid. You earn
returns by selling your assets for a profit—or realising your capital gains.

How are saving and investment similar?

Saving and investing are similar in many ways as both share one common goal: to help you accumulate
money for future use. Essentially, both savings and investments hold a monetary value that exists within
financial instruments. Both use specialised accounts with a financial institution to accumulate money.
And both require financial planning that involves analysing your financial goals.

What is the difference between Savings and Investment?

The difference between savings and investment is that saving is often deposited into a bank savings account or a fixed deposit. On the other hand, investing involves buying assets such as real estate, gold, stocks, or shares in mutual funds that have the potential to increase in value over time.

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Some of the difference between savings and investment are

  • Objective: The objective behind saving and investing is the biggest difference between the two. Savings are short-term and are used for emergencies and purchases, and can be done without much research. Investments are made to achieve bigger goals like building wealth, funding education, buying a house, etc. They often require long-term commitments and market research.
  • Protection against inflation: The value of cash in a saving account drops when inflation is on the rise, but investments are excellent financial products to combat inflation.
  • Returns: You usually earn a fixed and steady amount of interest on your savings. Investments, on the other hand, have the potential to yield much higher returns.
  • Risk: Savings usually have very low or negligible risk. Saving instruments like FDs, RDs and savings bank accounts will always give you steady interest on them. But, investments carry high risk as their value can fluctuate according to the market conditions and other economic and financial factors.
  • Liquidity: Savings instruments are usually high liquidity instruments. Therefore, they provide you with immediate access to money as and when you need it. On the other hand, investments usually offer low liquidity and hence financial experts recommend never to invest your emergency funds.
Basis of Comparison Savings Investment
Objective Smaller and short-term goals Bigger and long-term goals
Protection against inflation Offers little protection Offers high protection
Returns Low returns High returns
Risk very low or negligible risk High or medium risk
Liquidity High Usually low
Typical products Cash, bank saving account, FDs, RDs Real estate, bonds, stocks, equity, and mutual funds
Chit funds are an excellent savig as well as investment alternative

Saving or investing? The better option

The best option really depends on your current financial position and your goals. Follow this rule of thumb: If you need money for emergencies or within a year, save. If you don’t need the money for the next 3 years or more, invest.