Now that you have started earning, the words saving and investing float around quite a bit. Isn’t it? Mostly these terms are used interchangeably. In a way, they are similar but not technically. 

What is saving? And, what is investing? For starters, they are both critical for you to achieve your future financial goals. It could be buying a house, your own car, or to fund your higher education. You might also have aspirations to start a business or go on a foreign vacation. You need to take steps to save and invest money to have a comfortable future. If you aren’t doing either of them, you need to start now.

Before taking a look at the differences between saving and investing, let’s see their meaning and similarities.

What is Saving and Investing?

Saving is putting aside money for future goals, such as a down payment of a house or to act as an emergency fund during a medical crisis or job loss. Anyone at any age can start saving. Remember the childhood days, when we used piggy banks to save money? Now, you have bank accounts to do that. You need to pay close attention to your spending habits, especially discretionary expenses so that you can save money every month.

Investment means putting your money into various financial products to grow your wealth in the long term. This can include stocks, mutual funds, insurance, bonds, pension funds, real estate, and more. The rate of growth here is higher than saving, but there is also risk involved, 

The Similarities between Saving and Investing

At the core, you save and invest to accumulate wealth. You want to keep aside money for various life goals. 

Saving can be considered the first step toward investing. You can allocate a small part of your savings into liquid assets like bank fixed deposits (FD), and put the rest towards long-term wealth accumulation. There are Systematic Investment Plans (SIPs), where you can start paying a small amount every month into a fund, to inculcate disciplined investment.

Both can use special accounts with financial institutions for wealth creation. For savers, it means opening a bank account. The bank provides an interest on these savings that grows your money minimally. 

Indian investors usually open a DEMAT account with a brokerage. You will be able to invest in various securities on the platform. Both these processes of opening a bank account and brokerage account can be done online now, which is convenient. 

Difference between Saving and Investing

The primary difference between the two is the amount of risk involved. The foundation of wealth creation is not just saving money, but putting it to work so that it grows faster than it would if you just keep it in a savings account. That is why you need to invest in various growth venues, to provide a boost to your financial standing, which makes your goals attainable.

However, this comes at a risk. When you put money into a savings bank account or fixed deposit, there is little to no risk of loss of funds. But, if you invest in stocks, for instance, your investment will fluctuate due to market volatility. You might lose money in the short term. This is why; investments are best done for the long term. Also, you must invest wisely, based on how much loss you can tolerate.

Here is a snapshot of the key differences between saving and investing:

Saving

Investing

Return

Low

Potentially higher or lower

Risk

Low Higher; can vary across instruments

Time Horizon

Short-term

Long-term, more than 3 years

Difficulty

Low

Needs a little research and guidance

Tax Savings

Low

Higher potential

Typical Instruments Savings account, recurring deposit

Stocks, mutual funds, bonds, unit-linked insurance plans, pension funds, ETFs, etc.

 

Advantages of Investing 

Apart from the potential of higher long-term returns, investing helps in:

  • Keeping pace with inflation: Unless your savings grow faster than the inflation rate, they will be worth lesser in the future than their current value. Indian savings bank account rates usually lie between 2.5% to 6.5%.  In such a low interest-rate environment, you can’t beat inflation. This is why investments have to be done wisely so that you have comfortable retirement years.
  • Customised Plans: You can choose instruments based on your goals, time horizon, and risk tolerance limits.
  • Automatic Investments: Set up a bank mandate to invest small sums of money through SIPs. The money will be automatically debited from your account. You don’t have to start with a lump-sum amount right away.
  • Preferential Tax Treatment: Reduce your taxable income by investing in funds like ELSS (Equity Linked Investment Schemes), tax-saving fixed deposits, or ULIPs.

Saving Vs. Investment: Which is More Important

Both are important to cater to all your financial needs. Investing means locking your money for at least 5 years before you see some results if any.

Savings are needed to help you pay off your credit card bills, and utility bills, manage daily expenses, and other short-term payments. You can download the LazyPay app, and get alerts for missed payments on bills and loans. Go to our YouTube page to know more about LazyPay, and how it can help you manage your finances. 

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