Saving Vs Investment: A Quick Comparison

Grasping the difference between saving and investing is very important for keeping your finances secure and building a solid future. While people often mix these two terms up, they’re really different. Both saving and investing play a key role in personal finance, and getting started early can help you achieve lasting financial stability. However, keep one thing in mind: this is not a war of saving vs investment rather an analysis of both.

In this blog, we’ll explore what saving means, what investing is all about, and the ups and downs of each, plus some examples to make these ideas clear.

Let’s begin by exploring the concept of saving

Everyone knows what saving is, but what they don’t know is how saving money is more about discipline and mindset. Think about how you currently save money. What makes you want to save, and what are some problems you have to deal with?

People stash away cash for things they want to buy and for emergencies. Saving is a key part of personal finance where you set aside some dough for later use. Envision it as depositing a certain amount of money in a piggy bank, but instead of a piggy bank, one can opt for a savings account with an interest rate that accrues over time. There are many motivating factors regarding savings, such as purchasing a new device, going on a trip, or constructing a cushion for those unforeseeable expenses that may arise.

Maximizing savings has its inherent advantages, one of which is achieving short-term financial objectives or preparedness for certain emergencies like flat tires or hospital visits. Sometimes it is wise to save away some amounts of cash to assist one during hard times. Savings are usually low risk, so your money is safe, but that also means the interest rates aren’t all that high.

Types of saving account

• Regular savings account
• Zero balance or basic savings account
• Women’s savings account
• Kids’ saving account
• Senior citizens’ saving account
• Family savings account
• Salary account- salary based savings account

Pros and cons of saving

Benefits

• Savings is like a safety net—something you must have heard before. It covers your unexpected expenses, be it medical bills, car repairs, or job loss.
• It is a great way to help you reach specific financial goals, such as buying a house, starting a business, or funding your retirement.
• If you are depending on the savings account, you may earn interest on your deposits as it increases your savings over time.
• It helps your mind by keeping it away from stress and anxiety about money, acting just like a financial cushion.

Drawbacks

• You don’t want to miss out on higher returns from investments like stocks or bonds. This can happen if you keep your money in a low-interest savings account.
• Inflation is the evil that can erode the purchasing power of your savings over time. This means that your money may not be worth as much in the future.
• Can you beat the temptation? If yes, then it’s fine; if not, then easy access can let you spend it instead of saving for long-term goals.

Time to learn about investment

Investments are essentially about making your money work for you over time via stocks, bonds, and mutual funds. Saving and investing aren’t the same thing, since investing comes with some risks but also offers a good chance for better returns.

When you invest, you can hit big financial milestones, like covering college costs, buying a house, or getting ready for retirement. Because there is some measure of risk, it is very critical to get the right once that you want, how much risk you will be willing to take, and how long you will be holding the investment. Generally, the longer you can invest, the more risk you can handle since you’ll have time to ride out the market’s ups and downs.

Objectives of investment

• Get consistent cash flow from dividends, interest, or rental income.
• Keep your wealth safe from the sneaky effects of inflation.
• Build a nest egg for your retirement and diversify your portfolio to reduce risk.
• Transfer wealth to future generations and provide for loved ones.
• Reduce risk through diversification and hedging.

Types of investment

• Stocks
• Bonds
• Mutual Funds
• ULIP
• Savings/Endowment Policy
• Public Provident Fund (PPF)
• Real Estate

Steps to start investing

• Set financial goals
• Assess your risk tolerance
• Create a budget
• Research and educate yourself
• Open a brokerage account
• Start small and diversify
• Monitor and rebalance

Pros and cons of investment

Why investing is a good idea

• Investing can earn you more money than just putting it in a savings account, which means your money will grow over time.
• Stocks, bonds, and other investments can give you regular income in the form of returns or interest.
• If you put money away regularly, you can accumulate a good amount of money over time, especially if you use compound interest.
• Spreading your money around different types of assets is a good way to lower your risks and protect your money from market ups and downs.
• Investing is a great way to make money in your older years and is a very important part of planning for retirement.

Negative aspects about investing

• There is a chance that you will lose money when you invest. Your investment’s value can be changed by changes in the market, drops in the economy, and how well individual companies do.
• The value of your investments can change a lot, which means you might lose money in the short term.
• When you buy, your money is locked up, which means you might miss out on other opportunities or important needs.
• Coming up with business plans and learning about markets can be hard to understand and take a lot of time and work.
• A lot of investments have fees, such as management fees, transaction fees, and brokerage commissions that can cut into your profits.

An example to show you what the difference between saving and investment is.

Let’s say someone in India makes ₹ 100,000 a year and wants to put away ₹ 50,000. They can do one of two things:

Savings

• They put ₹ 50,000 into a savings account at a bank like HDFC Bank or State Bank of India.
• If the interest rate stays around 3.5% for a year, which is pretty normal for Indian savings accounts, they’ll have ₹51,750.
• This is saving because the money is in an easy-to-reach account with very little risk.
• The return is small, but it’s a sure thing, and you don’t have to pay taxes on interest up to ₹ 10,000 a year.

Invest

• They could invest that ₹ 50,000 in an equity mutual fund.
• After a year, if they get an 11% return (which is not guaranteed and can vary), they could end up with ₹55,500.
• This is seen as investing since they’re putting their cash into assets that might give them higher returns but also come with more risk.
• The returns can be bigger, but they’re not guaranteed, and the value could drop too.

What’s the deal with saving and investment?

1. Putting your money in bank accounts is safe in India because the government backs you up for up to ₹ 5 lakhs per account. But if you’re thinking about investing in mutual funds or stocks, just know there’s a bit more risk involved.

2. In India, savings account interest rates are usually better than what you find in many western countries, but they still don’t match the potential gains you can get from investing.

3. If you earn more than ₹ 10,000 a year from your savings account, you’ll have to pay taxes on that interest. On the other hand, some investments, like Equity Linked Savings Schemes (ELSS), can help you save on taxes thanks to Section 80C.

4. Inflation in India tends to run higher than in many developed nations, so it’s important to invest if you want to reach your long-term financial goals and outpace inflation.

5. For a long time, lots of folks went for physical assets like gold and real estate when investing, but that’s changing as more people become financially literate.

6. India has a bunch of government-supported saving schemes like the Public Provident Fund (PPF) and National Savings Certificate (NSC), which offer better interest rates than regular savings accounts and come with government guarantees.

Final thoughts

Going through this blog, you might have gotten a good idea about both savings and investments, the two most important concepts when it comes to finance. A basic knowledge about them is crucial; hence, read it thoroughly and also recommend it to those who want to know the basics of finance. Remember, Peak72 is always available for assistance.