Saving vs Investing: Understanding the difference

Many people sometimes use the words ‘saving’ and ‘investment’ interchangeably—either out of ignorance or lack of knowledge.

Either way, it’s important to understand that saving money is not the same as investing. In fact, popular personal finance strategies pit the two against each other – saving vs investing.

So, let’s explore the details of these two concepts to understand how they differ and the respective roles they can play in your financial growth.

What is saving?

Saving is essentially the practice of putting money aside to not spend it immediately and keep it for future use. It can be done either in cash or through a bank account.

Cash savings kept in the form of currency notes are completely dead in terms of returns as the amount will stay the same over the years, not keeping up with rising prices or inflation. Hence, you may actually be losing money in real terms if you save in cash and you don’t get suitable returns on your money.

But, if you save money in a savings bank account, you may still earn some form of interest at regular intervals, though the returns would still be relatively small compared to the prevailing inflation rate.

Saving money in a fixed deposit (FD) with a bank or financial institution can earn higher rates of returns. However, it comes at the cost of restricted access to that money, as the amount is locked for a predetermined period. Any premature withdrawal will attract extra charges, and you may not get the estimated return.

What is investment?

Investment goes a step beyond savings and involves personal finance strategies. Here, money is not just kept aside but is also put to use to achieve strong financial growth over the years.

An effective investing guide prompts people to use their capital to buy different assets in the hope that their value will rise.

Capital can be invested in stocks, provident funds, precious metals, commodities, bonds, real estate, mutual funds, and other assets.

Saving money vs investment

1. Risk factor: Saving is a low-risk phenomenon as your money is well-protected in your bank account or in your safe. Hence, it offers a sense of security. In comparison, investments are considered risky as they can either rise or fall in value over the time. The chances of you getting back less than what you invested initially can be as good as chances of you growing your wealth exponentially.
2. Time factor: The time factor also plays a crucial part in the savings account vs investment options debate. If you are focussing on short-term targets like buying new curtains for the house, or shopping for the new season, you can simply save money by putting some cash aside. But, if your targets are slightly long-term in nature, like going on a foreign vacation or buying a new car or house, then mere savings won’t help. Rather, you would have to choose an investment vehicle with an acceptable chance of growth that helps in generating not just inflation-beating but multiplying returns.
3. Liquidity factor: Deciding on when to save and when to invest also depends on your need to have free access to your cash reserves. Savings allow you to use your money as soon as an emergency arises. It can also be helpful for people who have unstable income. On the other hand, investment is usually a long-term commitment where your money gets tied up and may not be freely accessible for a while, depending on the nature of your investment vehicle.

In conclusion, it’s advisable to make a decision to choose between savings and investments only after assessing the nature of your goals, your individual financial circumstances, your need for liquid money and your risk appetite. And also, never use the words savings and investments interchangeably again.