Demystifying the difference between Saving & Investing

Demystifying the difference between Saving & Investing

08 jan 2020

The world of savings and investments has radically changed since the turn of the century. The unprecedented evolution of the financial markets and the introduction of new investment products have brought about a sea change in the way we deploy the monetary resources at our disposal.

We have grown up on stories of our previous generations having a disciplined approach towards personal finance matters and saving virtually every penny earned. Those were the days when traditional avenues such as Bank Deposits, Pubic Provident Fund, Life Insurance Policies, Real Estate and Gold were the instruments of choice for most people and ruled the roost.

As times changed, markets evolved, giving rise to a new set of aggressive products like direct stock investments and Mutual Funds, which offered tremendous scope for earning higher returns, albeit with a certain degree of risk. The equity culture is now omnipresent around us, and with higher financial education and awareness, more and more people can be expected to join the bandwagon.

This brings us to the question – What exactly constitutes Savings & Investing and how are they different?

It is imperative that all of us, especially the first-time investors, understand the nuances of savings and investing as also the different points. In this blog, we attempt to address this as follows.

Saving: The amount of money, out of your total earnings, that you do not spend or invest elsewhere, but instead let it idle in your bank account or preserve in cash is termed as “Savings”. The savings in the most primitive sense could be a piggy bank or a jar with coins - you are just storing it somewhere after collecting from what you have earned.

If you are clueless about where to meaningfully invest your hard-earned money, you may end up saving virtually every penny earned.

Although saving your hard-earned money has its merits, beyond a point, it is akin to hoarding, and you may also end up destroying the value of your money, if your bank account is not able to deliver a rate of return higher than the prevailing rate of inflation.

Investing: We have learnt above that the portion of your earnings which is left untouched is savings; now, let us shift to the concept of “Investing” – this essentially means the portion which is not kept idling in the bank account or in the form of cash, but instead suitably re-deployed into various financial instruments, which may be either Equity or Debt (Fixed Income).

Let us further understand five critical differences between investing and saving-

  • Duration - Savings are typically for small financial objectives to be met in shorter periods, say about 1-3 years or lesser to meet immediate financial needs, but on the other hand, investing generally is a long term plan for more significant financial goals. Say, you’re planning for your child’s education or wedding or your comfortable retired life, which is due in about five or more years ahead from now.
  • Availability of money - At a time of critical need of money, savings serve as handy cash while in the case of investing, access to your money depends on the kind of investments you make.
  • Risk - If you have savings in reputed banks, your money is safer in the bank accounts than at home, so the risk of losing money in savings is very low compared to any other investments. Risk in investing varies according to the channels of investments. If your money is invested in good quality companies with long term views, then short term ups and downs should not affect it.
  • Returns - Interest on savings accounts is often much lower. However, the investments in equity-based mutual fund schemes carry a much higher potential for long term value and growth.
  • Nature - Savings are for the present and investments are for the future. Investments are made typically for larger financial goals which may seem impossible now but would be possible in the time to come if they are wisely planned today.

The merit in investing vis-a-vis saving is that you allow your hard-earned money to grow and appreciate, instead of just let it idle in your savings bank account, which earns you a meagre rate of interest in case you have a long term goal to meet. With the help of the right investments, you secure the benefits of compounding and therefore multiply the value of your money that many times. Within the investment basket, opt for a judicious mix of equity and fixed income instruments, keeping in mind your age, your financial goals, the time required for reaching those goals and risk tolerance levels.

To sum up, saving is very different from investing; so, whether you are a wannabe investor, a first-time investor or a seasoned investor, you need to understand the subtler differences between the two so that you can fulfil all your financial life goals with ease by deploying your money in the right instruments.

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.