Difference between Savings and Investment12th October 2022 0 By indiafreenotes
Saving is setting aside some money for future expenses or needs. It is the first and foremost step towards leading a financially disciplined life. The savings fund comes as a boon during rainy days. A savings account or bank fixed deposits are some of the popular savings options in India. It is similar to holding cash. Our parents and grandparents have strongly believed in saving money for their children’s future to give them a comfortable life. That’s what kept them going and never touched their savings until and unless it was extremely necessary. While now most of us love to spend the money we earn and follow the ‘YOLO’ trend. Yes, You Only Live Once (YOLO). However, living without any financial hiccups should be the goal.
Objectives of Saving
- A rainy day fund for emergencies
- A down payment for a car or a home
- Putting money aside for a trip, new appliances, or a car
- Short-term educational expenses
- Utilizing alternatives for Tax-Free Savings Accounts
The pros and cons of saving
There are plenty of reasons you should save your hard-earned money. For one, it’s usually your safest bet, and it’s the best way to avoid losing any cash along the way. It’s also easy to do, and you can access the funds quickly when you need them.
All in all, saving comes with these benefits:
- Savings accounts tell you upfront how much interest you’ll earn on your balance.
- The Federal Deposit Insurance Corporation guarantees bank accounts up to Rs. 5,00,000, so while the returns are lower, you’re not going to lose any money when using a savings account.
- Bank products are generally very liquid, meaning you can get your money as soon as you need it, though you may incur a penalty if you want to access a CD before its maturity date.
- There are minimal fees. Maintenance fees or Regulation D violation fees (when more than six transactions are made out of a savings account in a month) are the only way a savings account at an FDIC-insured bank can lose value.
- Saving is generally straightforward and easy to do. There usually isn’t any upfront cost or learning curve.
Despite its perks, saving does have some drawbacks, including:
- Returns are low, meaning you could earn more by investing (but there’s no guarantee you will.)
- Because returns are low, you may lose purchasing power over time, as inflation eats away at your money.
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.
Objectives of Investment
- Paying for your children’s higher education
- Building wealth for the future
- Saving for retirement
The pros and cons of investing
Saving is definitely safer than investing, though it will likely not result in the most wealth accumulated over the long run.
Here are just a few of the benefits that investing your cash comes with:
- Investing products such as stocks can have much higher returns than savings accounts and CDs. Over time, the Standard & Poor’s 500 stock index (S&P 500), has returned about 10 percent annually, though the return can fluctuate greatly in any given year.
- Investing products are generally very liquid. Stocks, bonds and ETFs can easily be converted into cash on almost any weekday.
- If you own a broadly diversified collection of stocks, then you’re likely to easily beat inflation over long periods of time and increase your purchasing power. Currently, the target inflation rate that the Federal Reserve uses is 2 percent, but it’s been much higher over the past year. If your return is below the inflation rate, you’re losing purchasing power over time.
While there’s the potential for higher returns, investing has quite a few drawbacks, including:
- Returns are not guaranteed, and there’s a good chance you will lose money at least in the short term as the value of your assets fluctuates.
- Depending on when you sell and the health of the overall economy, you may not get back what you initially invested.
- You’ll want to let your money stay in an investment account for at least five years, so that you can hopefully ride out any short-term downdrafts. In general, you’ll want to hold your investments as long as possible and that means not accessing them.
- Because investing can be complex, you’ll probably need some expert help doing it unless you have the time and skillset to teach yourself how.
- Fees can be higher in brokerage accounts. You may have to pay to trade a stock or fund, though many brokers offer free trades these days. And you may need to pay an expert to manage your money.
|Meaning||Savings represents that part of the person’s income which is not used for consumption.||Investment refers to the process of investing funds in capital assets, with a view to generate returns.|
|Returns||No or less||Comparatively high|
|Liquidity||Highly liquid||Less liquid|
|Risk||Low or negligible||Very high|
|Purpose||Savings are made to fulfill short term or urgent requirements.||Investment is made to provide returns and help in capital formation.|
|Long term asset. Suitable for goals such as a child’s education, marriage, buying a house, etc.||Short term asset. Suitable for short term goals such as buying furniture, home appliances, or meeting emergency requirements.|
|Products||Stocks, Bonds, Mutual Funds, Gold, Real Estate, etc.||Savings account, Certificate of deposits, money market instruments, etc.|
|Protection against Inflation||Good protection against inflation.||Only a little.|