BAJAJ BROKING
September 19, 2024
4 mins read
Understanding the difference between savings and investments is important for all of us to make prudent financial decisions. To put it simply, we save money for our short-term goals. So, if we need money for something within the next 12 months, we start saving.
However, we invest for a long-term objective. For example, if we know that we will need money 20 years from now, we should invest. Read this blog because it explains the concept of savings vs investments, how to differentiate between these two terms, when to save, and when to invest.
When we do not spend a part of our income, the unspent part is known as savings. For example, if an individual earns ₹20,000 per month and spends ₹15,000 on all his expenses, the remaining ₹5,000 are his savings for the month.
Generally, people save for uncertain situations and to meet a short-term goal. In the example discussed above, the person’s monthly savings can come in handy if he has to suddenly pay for an expenditure. Or, he may save for a few months to go for a vacation.
Typically, people save a fixed amount every month, which they put in a savings bank account on which they earn a low rate of interest. The money kept in such an account is very safe.
When we save money, we should invest it. Otherwise, the interest on savings bank accounts is so low that the value of our savings will get depleted over time. Therefore, we invest our savings so that they grow over a period of time in such a manner that we get a much higher return than inflation.
We can invest our savings in shares, mutual funds, bonds, debentures, real estate, etc. That said, investing comes at a higher risk than savings. Investments are mostly meant for long-term financial objectives. For example, you can invest so that you will be able to fund your children’s education in the future.
The following table explains how to grasp the concept of savings vs investments.
Savings | Investments |
Saving involves putting aside a part of your income and not spending it. | Investments involve putting the money saved in instruments like stocks, mutual funds, debentures, real estate, etc. so that the value of such funds grows significantly over time. |
When we save money, we typically keep that money in a savings bank account, which is an extremely safe option. | Compared to savings, investments can be much more risky. For example, when we invest in a mutual fund or a flat, we are not sure whether its value will increase in the future or not. |
The basic purpose of savings is to either pay for a short-term goal or park those savings in investments. | The basic purpose of investments is to meet a long-term financial objective. |
Savings are typically for a short-term goal. For example, you can save to buy a laptop or you can save to go on a vacation. | Investments are mostly for a long-term objective. For example, young people start investing for their retirement in their 20s so that they have a sizeable corpus once they retire at 60. |
If you expect financial contingencies, like you may lose your job in the next 12 months, then you should focus on savings. When you save, you mostly park funds in a savings bank account, which is extremely liquid. This means that you can withdraw funds from the bank account whenever you feel like.
You should choose savings over investments for your short-term goals. For example, if you want to buy an expensive smartphone in the next 6 months, you should save. You cannot invest for a short-term goal because investments typically lock your funds for more than a year.
When you want to achieve a long-term goal, you should choose investments over savings. Imagine you are in your 30s and have just become a parent. You should start investing in a fund for your kid’s higher education.
An MBA degree costs upwards of ₹20 lakhs in India today. Hence, you should start investing for your children’s education the moment they are born. You should also prioritise investing over savings when you are young. If you start investing even small amounts in your 20s or 30s, they will accumulate to become a sizable fund by the time you are in your 60s or 70s due to the power of compounding.
Combining Savings and Investments for a Balanced Financial Strategy
We all need to save and invest both. But often, people struggle to strike a balance between the two. You should save up to a point when you have around 3 to 6 months of your salary in a savings bank account. This will provide you with a buffer against unexpected financial obligations.
Once you have saved around 3 to 6 months of your salary, it’s futile to keep on savings because you do not earn a high return on your savings. Hence, at this stage, you should start investing. Always keep your long-term financial goals in mind while investing in shares, bonds, mutual funds, real estate, or any other option.
If you have just opened an online demat account, you should get a grip on the concept of “savings vs investments.” You should learn when to save and when to invest. This will help you meet your short-term and long-term financial goals.
However, if you are confused between these two terms, you may save when you should be investing and you may invest when you should be saving. This can have adverse consequences. Hence, learning to differentiate between savings and investments should be the first step of your financial journey.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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Savings are meant for short-term goals or simply to invest the money saved. On the other hand, investments are meant for long term objectives.
If you do not differentiate between saving and investing, you will not know whether you are actually saving or investing. Hence, you will struggle to meet your short-term and long-term financial goals.
Investments are for a much longer duration than savings. Hence, they tend to be riskier. Besides, investments are in stocks, mutual funds, real estate, etc. which are riskier asset classes than a savings bank account.
No, a savings account cannot be considered an investment because it is not meant for a long-term goal. Besides, you can withdraw money anytime from your savings bank account; however, in investments, your funds are usually locked for more than a year.
Typically, returns on savings are much lower than that on investments. A savings bank account usually provides 2.5%-4% per year interest in India. However, investments in mutual funds, stocks, and real-estate, when done correctly, can provide a much higher return.
If you need money within a year, you should choose savings over investments. However, if you can keep your funds parked for longer than a year, you should select investments over savings.
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