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Most of us have a common misconception that investing is the same as saving. Though these terms are often used inter-changeably by several investors, they are quite different. This article aims to debust this common myth regarding personal finance.
What is saving?
Saving constitutes the difference between your annual income and your annual expenses. It is the act of dedicating and saving money for any future needs. Common examples include bank fixed deposits (FD), savings account, savings scheme, etc.
What is investing?
Investing is the process of utilizing the funds set aside during saving and investing in different types of investment to meet your financial goals. These investment options could be either used to preserve wealth or generate wealth or both, depending on the investment needs of the investor. Common types of investment include debt funds, equity and equity-related securities, gold, mutual funds, ETFs (exchange-traded funds), real estate, bonds, etc.
Importance of saving
We can list several reasons why you must save a part of your hard-earned income. Below we have listed some reasons:
- It acts as a stepping stone to investing
Investors often perceive savings as residual which is left after accounting for all their expenditure. However, it should be the other way around. Your expenses must be looked as residual. Savings can be further used to allocate funds in your desired investment options. Thus, savings act as a stepping stone to investing.
- It helps to create a financial cushion for investors
Emergencies in life often do not come knocking. For such unforeseen circumstances, you must be prepared by having enough funds in your savings account or highly liquid instruments such as liquid funds. Experts recommend at least three to six months savings of an investor’s monthly expenses. A part of this savings can be invested in savings account and another can end up in liquid funds or money market instruments.
Importance of investing
Investments hold the key to an investor’s future as they aid in achieving an investor’s financial goals. Let’s understand the importance of investing:
- It helps to earn substantial returns – Investment options such as stocks and mutual funds are likely to earn significant returns provided that you invest in the right investment avenue and stay invested for the desired time.
- It helps investors to achieve their financial goals – All investors have varying aspirations and goals in life. It can be as simple as buying a new phone or repairing your house to complex ones such as saving for your retirement, or your child’s marriage. Whatever maybe your financial objective, investments can help you achieve them. Whether you have short-term goals, mid-term goals, or long-term goals, different investments can be used to achieve them.
- It helps to beat inflation – Earnings earned on most investment options have the potential to beat inflation over a period of time. Inflation has the tendency to eat a huge chunk of your returns. Inflation decreases purchasing power parity of rupees and also decreases the value of rupees over time. Hence, it is advised to invest in securities that fetch inflation-beating returns.
The choice between saving and investing is entirely dependent on the investor. An investor should make decision according to an investor’s risk appetite, duration, and financial and personal goals. For instance, if you need the money in the near future, you might consider allocating your funds in a savings scheme. However, if you wish to generate wealth for a goal which is far, investing can be the best option. Happy investing!