Difference Between Savings and Investment Plan

Most individuals, particularly rookie investors, confuse savings and investment. However, they are fundamentally separate objects with distinct functions and duties in your financial plan. Make certain you understand this key principle before embarking on your quest for prosperity and financial independence.

Choosing the best account to fit your financial goals is a very important part of beginning financial security, and it needs proper consideration. In order to make the best choice, you've got to know the difference between savings and investment, which may not be as obvious as you think.

Let's break it down.

Saving is defined as revenue that is still not spent or postponed consumption. Saving plans comprise putting money away for future use. Saving also entails lowering expenses, such as recurrent charges. Saving in the world of personal finance often refers to low-risk wealth preservation, such as in a savings account, as opposed to investing, which has a much higher risk. In economics, it relates to any earning that is not utilised for instant consumption. The concept of saving does not always entail interest. ¹

The pros of a savings plan include:

• Easy access to saved funds
• Lower risk
• Pre-defined interest rate on saving funds
• Low to moderate fees charged
• High liquidity on bank saving plans

The cons of a savings plan include:

• Low-interest rates
• Maintaining savings is a tough habit
• Long-term saving plans may not offer easy fund access

Investment can be defined as the commitment of funds to the acquisition of an asset to increase its value over the term. Investment necessitates the sacrifice of a current item, like time, cash, or energy.

Investing in the world of personal finance is to earn a return on the invested resource. A profit or loss amount realised through the sale of an asset or investment instrument, or investment income like rental income, interests, dividends, unrealised capital depreciation or appreciation, or a mix of capital income and gain, may constitute the return of investment.³

The pros of an investment plan include

• Higher interest rate
• Flexible asset allocation
• Beats inflation if correctly utilised

The cons of an investment plan include:

• Subject to market risks
• Complicated issues for beginners
• Moderate fees and charges depending on the fund manager
• Reasonable amount of research and skill set is required.

Here are the common differences between savings plans and investment plans:

• Goal:
  The primary distinction between saving plans and investment plans is the goal behind each. Saving plans are intended for the short term and are utilised for necessities and emergency funds, so they may be done quickly without much research or skill. At its most basic level, savings is the act of setting aside extra money that can be used in the future. This could be for a specific purpose or just a generic reserve available for random use. Investments are made to attain larger financial objectives such as children’s education funding, wealth creation, home ownership, and so on. They frequently need long-term commitments as well as market research.


• Inflation protection:
  As the rate of inflation goes up, the purchasing power of cash stored in a savings account falls, but investments are good financial instruments to reduce inflation effects.


• Returns:
  Savings often yield a defined and consistent rate of return. Investments, in contrast, have the potential to produce far more significant returns.


• Involved risk:
  Savings often carry very little or no risk. Saving instruments such as Fixed Deposits, Recurring Deposits, and bank savings accounts will always provide you with consistent interest. However, investments are high risk since their value fluctuates depending on market circumstances and other financial and economic variables.


• Liquidity rate:
  Savings plans are often highly liquid. As a result, they offer you rapid access to your money whenever you need it. Investment plans, on the other side, typically provide poor liquidity, so money managers advise never investing your emergency savings.

To sum it all up,

If you are still struggling between saving plans and investment plans, here are some pointers that can help you make the final decision.

• The ideal choice is truly determined by your existing financial situation and ambitions. Follow this prevalent rule of thumb: use saving plans if you need cash for any emergency or within 12 months. Use investing plans if you won't need the cash for at least three years.


• You should begin investing when you have established an emergency fund. About three months to six months’ worth of expenses should be saved in an emergency fund.


• If you wish to achieve your long-term goals, such as retirement, you need to use investment plans.


• While investing might be difficult, there are simple methods to get started. However, an ample amount of research is recommended.

Defining savings and investments as distinctly separate aspects of your financial plan can help free you from the mental limitations that prevent you from visualising your financial goals in a realistic, tangible sense. By defining these two terms, understanding their functions, and separating them within your mind, you'll gain a heightened sense of control over your finances—a crucial step down the road to financial independence. However, before you begin to truly invest in passive income or any other avenue towards wealth creation, consider saving an emergency fund.