Most individuals, especially newbie investors, equate saving and investing. However, they are completely different elements with very different functions and position differently in your financial plan and balance sheet. Make sure you understand this key idea before setting out on your path to financial independence and wealth.
Start now, if you haven't already. It might be necessary for you to alter your spending patterns, budget, and financial planning, but it can and should be a part of your strategy. Savings decisions should typically be made over the short term, while investments should be for the long term.
Read on to know more about saving and investments and how you should plan for both in the long run.
What is saving?
Saving is the act of setting money aside in bank accounts for a future expense or necessity. Saving money is a very low-risk, liquid investment that may be accessed promptly in case of emergencies or purchases.
Savings can be done randomly or with a purpose in mind, like saving for a new phone or vacation. We put money aside for purchases and unforeseen costs. Saving money often entails holding it on hand when required and minimising the likelihood that its worth will diminish. It's important to keep track of your savings by giving them a value and a due date.
What is investing?
The act of investing involves putting money into financial products and investment opportunities that will grow and help you amass wealth.
Investing aims to both save money and make money from it. When you do this, it is vital to make prudent investments. Your return will be better if you start investing early. Understanding the different investment vehicles, what they are for, and how to use them is essential for success. We save for long-term goals like retirement or funding our kids' college education. We use specific platforms that facilitate this kind of growth as well.
Major differences between saving and investment!
| SAVINGS | INVESTING |
|---|
| Savings refers to the act of depositing funds into a savings account. This could be a money market account, a certificate of deposit (CD), or another common type of bank account. | When you buy a piece of property to see your investment grow, you are investing. As a result, you would be able to raise the prevailing worth of your finances. |
| Money is only minimally at risk when it is deposited into a savings account. | A larger level of risk is involved when you invest by buying something like stakes in a firm. |
| The likelihood that you will lose money is quite minimal because money put into savings accounts often won't move and is probably insured up to a specific portion. | This is because an item like stock shares might change in value and ultimately end up being worth less than what you originally paid for them. Loss results from that. |
| Savings plans don't protect against [inflation](https://lifeinsurance.adityabirlacapital.com/articles/your-money/how-to-beat-inflation-with-your-savings/). With rising inflation, your money's purchasing power will decline in your bank account. | Over time, you can reduce inflation by placing your money in the correct assets. Early stock market investors have a better chance of outpacing inflation than late investors. |
| Interest rates on savings accounts and other types of saving schemes, such as fixed deposits, produce an ongoing, secure return. | On the other hand, investments are tools for building wealth. Investments in equities, ETFs, and mutual funds typically produce larger returns over time. |
Is Saving or Investing Better?
The gist of the matter is that doing both is preferable.
- Investing is all about the long term, whereas saving is a short-term financial plan. In an ideal scenario, you should save money as well as invest it to ensure that all of your bases are covered.
- The best place to start when considering whether to invest or save is by determining how much of your income you can realistically afford to set aside each month.
- After you have a number in mind, you can start considering how to divide it up so that you have enough to cover all the many expenditures of your life and all the people you care about.
- If you want to make sure that you always have access to short-term, liquid cash in case for you or for your children, you can think about creating an emergency fund in the form of a straightforward savings account.
- Secondly, think about the expenses you might have in the following 5 to 10 years.
- Finally, consider all you intend to do in the next ten or more years.
- This may include all expensive expenses like covering a child's education costs, a wedding, or retirement. You should think about investing in all these long-term costs.
Myths about saving and investing
A myth only becomes a fact if it is repeated often enough. This saying is accurate, especially when it comes to saving and investing, where a dearth of reliable personal financial tools has given rise to numerous myths.
Here's a list of some of the misconceptions that people have about saving and investing:
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Saving is equivalent to investing
People frequently claim that saving up cash in a bank savings account constitutes investing. That is untrue.
In actuality, saving money from your paycheck is a crucial activity. But it might not be sufficient. Also, it differs from investing in stocks, ETFs, mutual funds, and other types of investments wherein your savings may grow multifold, if invested rightly.
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Investing is only for the rich
Many people think that investing is something that only the wealthy and powerful do. Most people don't have enough money to invest, and those that do are deceived about saving and investing even when they do.
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Investing Requires a Lot of Money
In keeping with the preceding myth, there is a widespread notion that you require a sizable sum of money to begin investing in ETFs, equities, mutual funds, and other types of investments. This is not true.
Even if good investments do come at a price, you only need a little amount of money to get started. Also, you might be able to start with as little as Rs. 500 with some mutual funds. With these two calculators, you can see how powerful compounding is:
- SIP Calculator
- Lumpsum Calculator
Investors need patience and to invest in quality rather than quantity based on what is morally correct.
There is, in fact, an investment option available for everyone, but it is recommended to wait to invest until you have carefully considered your risk tolerance and financial objectives.
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One should start saving and investing, at a "Right Age."
The results can get better all along as you give money and time to compounding. That's good news for people who wish to start saving and investing later in life.
The truth is that starting investments as soon as you can is preferable rather than hanging around on the fact of starting late. By doing this, you will have the opportunity to potentially earn higher returns than by keeping your extra cash on hand.
Also, not everyone has a similar life story. Comparing your journey to others life or debating whether you should be investing in the first place may hinder your ability to build money.
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It's too early to begin retirement savings
A working adult in their 20s or 30s might think retirement is decades away. This may also be apparent in their investment strategy. Not everyone will be able to enjoy the luxury of a pension, which is an unpleasant reality.
You have a better chance of being able to meet your post-retirement demands with the returns your money has generated, the earlier you begin financial planning for your retirement.
Also, it might set you up for financial independence before retirement.
Many young investors like to start small when making retirement investments and gradually increase the amount as they get older. This is believed to be much more beneficial than setting aside huge sums of money for retirement later in life.
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You don't need to plan your taxes
Honestly speaking, taxes are confusing. So much so that many people might decide not to arrange their taxes. Thus, the illusion is "I don't require to schedule taxes". It will be deducted nevertheless.
The fact is that effective tax planning may both save you money and increase your profits.
For instance, investing in NSC, Tax Saving FDs, ELSS Funds, and other financial products can enable you to save Rs 1.5 lakh from your taxable income under Section 80C. To receive the advantage, you must invest an equivalent sum.
NPS can also assist you in saving an additional Rs. 50,000 under Section 80CCD (1B). But before you begin organising your taxes, you must be aware of the following three factors:
- Your tax slab
- Financial targets
- Investments that reduce taxes
By limiting the investment horizon that a person can access, financial myths have been shown to hinder wealth growth. You may be able to get over obstacles and dispel illusions about investing and saving by using the tips above.
Recognize that investment is essential if you want to stand a decent chance of outpacing inflation and reaching several financial objectives.
Final Thoughts
In conclusion, saving and investing are two unique concepts that must be coupled to protect your financial future in this continually developing market.
If you don't want the rising living expenses to eat into your accumulated wealth and savings, investing is essential.
The concept of compounding does wonders for growing your financial empire. Also, your money will often ride the market's fluxes if you invest for a longer duration.
1800-270-7000
24 February 2025
5 mins read
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