Investment and Saving
When you meet a financial advisor, you’ll hear these two words saving and investing for sure. Often, Saving and Investing are used interchangeably, however, both are different.
Saving is the excess money set aside for emergencies or future purchases after accounting for monthly expenses. It’s money that you would want to be able to access quickly, with least taxes and litter or no risk.
Investing is buying assets. These can be real estate, gold, bond, stocks, mutual funds, etc. The expectation is that your investment will appreciate your money. Investments are suitable to achieve long term goals.
Depending on your goals and risk appetite you’ll have to choose between saving or investing.
Difference between Investment and Saving
- Period: Savings are for short term financial objectives. For example, if you want to buy a mobile phone or for a domestic weekend getaway, savings is the right way to meet such objectives. While on the other hand, investing is for the long term to meet bigger financial goals. For example, a child’s education, wedding, retirement, etc. Investing early in your career will help you achieve long term goals without much hassle.
- Access to money: During emergencies, savings are the ones come handy. You’ll have access to your money in savings. Depending on your need you can use part or all of your savings. While investing, access to money depends on the type of your investment. In case of mutual funds, open-ended funds can be redeemed any time, while close-ended funds would require to stay invested for a particular duration. Also, ELSS funds come with a lock-in of 3 years.
- Risk: Saving your money in reputed banks is much safer than holding cash at home. This also helps your money grow as it is entitled to interest. While investing mediums come with inherent risk. Potential to lose money is high if you are not invested in high-quality funds. A financial advisor bridges the gap between investing and investing in quality funds. Risk across instruments varies. Mutual Funds provide scheme details that indicate the possible risk involved. In the long run, without any doubt investing would give higher returns than savings.
- Returns: Returns from a savings account are lower. FD’s on an average earn you interest up to 7%-8%. While equity investments have a higher potential to earn higher returns in the long term.
- Choice: First identify your purpose i.e. why do you want to save or invest money? It’s advised to save money for small term goals, casual expenses, emergencies, as it provides quick access. But, when it comes to long term goals, these savings might fall short to meet them. Rising inflation, changing needs and limited income sources would be the potential hindrances. Savings are for the present, while investments are for the future. Goals with bigger financial obligations become more realistic with smart investing in the long term. Dreams do not follow inflation. Therefore, for small term goals, saving is the best choice and simultaneously investing for long term goals would make it simple to achieve them.
How much should you Save Vs. How much should you Invest?
Saving is always before investing. Unless you have savings, you wont be able to have capital feed for your investments. When times get rough, you’ll have to sell your investments, but is this the way to achieve your goals? The answer is a big NO.
It good to have savings that would cover your expenses for at least six months. These expenses should include all your domestic expenses, mortgages, loan payments, insurance costs, etc. In the event of loss of employment, this will come as a savior for at least 6 months.
This doesn’t mean that only after building a fund that would cover for your six month expenses you’ll start thinking about investing for long term goals. The approach should be such that on a regular basis you are setting aside certain amount through SIPs in mutual funds to achieve your long term goals. If you are able to save/invest at least 70% of your income, then you should aim to have 15% dedicated to your savings and remaining 55% investing.
Having money in a savings bank account can be classified under ‘savings’ but not ‘investment’. In a savings bank account, your money lies idle. Too much savings and too little of investment doesn’t create wealth for you.
In fact, with liquid funds and the instant redemption facility your savings are getting a boost. Transfer your excess savings to a liquid fund and hold minimum amount in your bank account. Parking money in Liquid fund is considered saving and not investing.
Who can help you start investing?
If you are ready to start your investment journey and are worried how to start it, then the best you can do is talk to a financial advisor. If you are a person who doesn’t understand the market and are willing to start investing, Upwardly is the place where you should go.
Upwardly gives its investors personalized advices for investing upon considering various factors. It has multiple pre-built goals which makes it easier for the client to start investing.
If you are seeing to increase your wealth, then savings alone will not do the work for you. As they only accumulate funds. You should always mobilize your savings. In other words, put the savings to productive use. There are multiple options to do so, one of which is investments. Even though these come with certain risk, its worth the risk as there wouldn’t be any profit with out risk. Let your savings take care of your immediate financial requirements and investments help you achieve your long term goals.
Happy Investing with Upwardly!