Savings and investments. Are they not the same thing?
Although they share the same concept of putting money aside for the future, they are both poles apart in a logical sense.
Most often, people tend to confuse between savings and investments. They end up perceiving that both the terms carry the same meaning. However, the two activities have different purposes and roles to play in your financial life.
- So, if they are different, Should you save or invest?
- How much should you Save/Invest?
Stay with me till the end to find out the answers.
In this post, l will discuss the fundamentals of saving and investing and point out to you the nuances between the two related yet independent activities.
What Exactly Is Saving?
Saving is when you put your earnings aside as cash in safe and liquid accounts (somewhere where it can be accessed easily for later use). The liquid account may include savings accounts, current accounts, treasury bills, etc. You may not get many returns from your savings.
Cash reserves or savings, as we call them, must be within your reach. Meaning you must be able to access the cash without much delay in any situation.
Basically, Savings means putting aside today’s income for future use.
Then, What is Investing?
Investing also is based on the same concept, saving for the future. But the difference here is that you will be using your savings to buy an asset after carefully considering if the investment has a good return generating capacity over a period. The main goal of investing is to beat inflation and build wealth.
Investment can be in many forms. There are some traditional investments such as stocks, bonds, and money markets. And there are the others, namely, cryptocurrencies, gold, ETF, etc.
Savings vs. Investing – An Analysis
|Idea||To meet short-term needs or sudden expenses.||Wealth creation and capital appreciation for beating inflation|
|Period||Ideal for Short-term||Can be long-term, mid-term, and short-term|
|Liquidity||Can be withdrawn quickly in time of need||It usually comes with a lock-in period. Some options available could be highly liquid.|
|Risk||Entails low risk and is considered safe||The risk involved varies depending on the asset and its market.|
|Capital Requirement||Small amounts can be set aside as savings.||Some investments are capital intensive while others may not be|
|Typical Products||Savings accounts, current accounts, etc||Stocks, Cryptocurrencies, Mutual Funds, Fixed Deposits, etc.|
Saving or Investing – Which is Better?
Saving and investing may be independent activities, but they are related, and one cannot be substituted for another.
You may choose between investing in stocks or cryptocurrencies or between saving in treasury bills or savings accounts. But wondering whether you should save or invest does not make sense.
Saving acts as a foundation stone for your investment. Every successful investor would have started by saving unless they inherited colossal capital. So, the process of building wealth should ideally be
- Earn -> Budget -> Spend Wise -> Save -> Acquire Knowledge -> Invest
If you want to follow the path of the infamous investor Warren Buffet:
“Do not save what is left after spending, but spend what is left after saving.”
Either way, Saving is the first step to building wealth. But saving alone would not suffice because the interest earned by keeping your money in a savings account will hardly beat inflation.
So, once you have saved a sum of money, you can invest in an asset to generate higher returns in the future. Generally, any amount that you may not need in the next year can be considered for investing.
Investing in assets such as cryptocurrencies, equities, etc., generate returns at a higher percentage than the inflation rate. Thus, investments not only enable you to beat inflation but also accumulated more wealth over time.
Now coming back to the original question.
- Should you save or invest?
- And how much should you save/invest?
Considering the above factors, it seems evident that saving and investing are equally essential to building wealth. You may not be able to achieve your goals on time just by saving alone.
At the same time, if you decide to invest everything you earn, you may have to rely on selling your investments in times of need.
So, you can start by saving, and once you have enough to meet your needs, you may invest the excess money.
[su_note] KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing. [/su_note]
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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