The terms ‘investing’ and ‘saving’ are often used interchangeably. With individuals referring to their investments as their life savings, the fundamental difference between the two terms, and essentially the two concepts, has drastically diminished. However, one must understand that these are different concepts that work in tandem. This article will emphasise on the differences between saving and investing.

What is ‘Saving’?

Saving is the act of setting aside money for a future need or expense, i.e. for unforeseen situations. Financial institutions offer several savings’ options, the most common being savings account in a bank, or fixed deposits, etc.

What is ‘Investing’?

Investing is the process of putting your money in financial products and investment avenues that offer the potential to generate income or aid in wealth creation. The most popular investment options in India include stocks, mutual funds, real estate, bonds, ETFs (exchange-traded funds), etc. It’s important to remember that risk and return go hand in hand when it comes to investing.

Why is ‘Saving’ Important?

There are several reasons why you should save your hard-earned money. Here are some of the top benefits of your savings:

1. Emergency cushion: Savings are a must regardless of the purpose for which they are ultimately used. Emergencies can come unannounced: you might lose your job, or have a medical emergency in the family, or plan to start your own business. In these circumstances, you need liquidity to fall back on. Thus, it is always advised to set aside at least 3 to 6 months of your income for an emergency.
2. Stepping stone to investing Saving is the difference between your income and expenses. Out of the money saved, allocate a small portion to liquid assets such as bank fixed deposits or liquid funds and the rest to long-term wealth creation.

Importance of Investing

Investments hold the key to one’s future as they aid you in realising your dreams. Following are some of the top benefits of investing:

1. Beat inflation: Investing your money helps you to beat inflation over time. If you don’t invest, chances are your purchasing power will decline as inflation tends to eat away the value of money over time. To insure yourself against this situation, it makes sense to invest your money in investment avenues that have the potential to yield inflation-beating returns. 

2. Realise your financial goals: Whether it’s buying a house, a car, or saving up for your marriage, or paying for your child’s higher education, or planning for your retirement, investing can help you to meet all such financial goals. Investing your money is one of the best ways to achieve your long-term goals. 

3. Earn higher returns Investment avenues such as mutual funds or stocks have the potential to fetch higher returns than fixed deposits or savings account.

Saving vs Investing

Savings accounts offer ready access to cash, but might limit the number of withdrawals you can make

Which is better? Saving or Investing?

The right choice between saving or investing depends on your financial position, risk tolerance, and financial goals. However, you can consider following these two rules:

1. If you need the money shortly, say within a year or so, or you wish to create an emergency fund, you might consider a savings account.
2. If you want to grow your wealth over the long-term, then you might consider investing.

Let’s understand this with a real-life example^*.

Manan can save Rs. 20,000 each month. He is confused if he should keep this amount in a savings account or invest in mutual funds. Let’s compare the wealth creation capacity of the savings options vs mutual fund investments to get better clarity.

The above table illustrates how investment products create greater wealth over the long run. If you stay invested for the long-term at a higher rate of return, your returns earned on the principal keep getting reinvested to accumulate a higher corpus. This is how the power of compounding works.

Saving and investing are two different concepts that work in tandem to secure your financial future; neither can survive without the other in this constantly inflating market. Investing is essential if you want to keep up with the ever-rising cost of living. Remember, the sooner you start, the more wealth you accumulate over the long run. The magic of compounding works wonders to boost your wealth empire. Further, when you invest for a longer duration, your investments tend to ride the volatilities of the market. Happy Investing!