Everyone wants to be financially secure in life. Be it salaried individual, businessperson, or a self-employed professional, all are working towards achieving financial independence.
Most people know that financial security can be achieved through saving and investing their hard-earned money. However, people can confuse saving with investing. Both these terms have different implications. Let us understand more about savings and investment below.
You may have to meet some regular expenses to sustain your lifestyle. You arrange funds for such spending from the money you earn. Savings refer to the money you have not spent and saved for the future.
Therefore, Savings = Income – Expenses
Bank savings accounts and fixed deposits are examples of savings.
Investment is the process of using your money to buy financial products or assets that can help you to generate wealth in the long term. For example, unit-linked insurance plans, mutual funds and equities are investment products.
|Objective||The objective of savings is to meet near-future goals and sudden expenses.||Investments are meant for long term capital appreciation and generation of wealth.|
|Return||The Rate of return is low.||You can get relatively higher returns on your investment.|
|Risk||Savings do not have any significant risk associated with them.||Market-linked investments can entail higher risk. However, risk-averse investors can invest in less risky investments like debts and non-linked insurance products.|
|Duration of Investments||Savings are good for shorter durations like six months or two years.||Investments can work wonders for your portfolio if you stay invested for a long time, such as 10 to 30 years.|
|Liquidity||Savings generally have the maximum liquidity. You can withdraw money from your savings account anytime.||Investments generally have relatively low liquidity. Most long-term investment products such as ULIPs come with a minimum lock-in period.|
|Inflation||With their low and predictable rate of returns, savings cannot safeguard your money from losing value over time because of inflation.||Investments, with the compounding effect, can help you beat inflation by building a substantial retirement corpus by the time you retire.|
Simply put, you need savings to arrange for the money to invest, and you need to invest your money as it will keep losing its value on sitting in savings.
You can picture savings and investment as two sides of the same coin. They go hand in hand. Therefore, your financial strategy should have a balanced exposure in savings and investment products.
Ideally, your savings should be made of funds that can help you to get through any financial emergency, while the rest of your idle fund should go toward building an investment portfolio comprising of both equities and debt instruments.
Another critical factor to consider is time. The earlier you begin, the better are your chances of accumulating and growing your wealth. So, save small, invest small, maintain financial discipline, and you are already on your way towards financial freedom.