You’ve probably heard the terms ‘savings’ and ‘investment’ a hundred times, now that you’ve left your teenage and have moved into the adult phase. If you’re like most of the millennials out there who have just graduated and are still figuring out how this entire finance thing works, then you’re likely to have been intimidated by all these words. Intimidation and fear, however, thrive where ignorance prevails and the best way to kill this fear and do away with the doubt and apprehension is to learn more about it. This article promises to do just that – explain these terms and help you understand the difference between them in simple language, without dumping a truckload of banking and financial jargon.
Before we get into the nitty gritty of savings and investment, we’ll first explain what they are.
Savings is simply saving money. It’s the process of putting cold, hard cash aside and then keeping it extremely safe, and liquid in savings accounts. By liquid we mean that you should be able to access the cash or your money, as and when you need it, without delays or penalties or clauses. Savings is the amount of money left over after spending from your disposable income. Savings accounts are one of the best options to deposit your hard earned cash and is the easiest way to save your money and earn a steady interest through it. A savings account makes sure that your money is safe and secure. Most banks now offer a host of benefits to their customers who are savings account holders. Banks have also now begun zero balance savings accounts which do not require the account holder to maintain a minimum balance in their account and therefore, do not penalise the account holders for not maintaining a balance.
Investment is the process of investing money, or capital, to buy an asset that you think has a good probability of generating a safe and acceptable rate of return over time, thereby, making you wealthier, even if it means suffering volatility. Good investments are most often than not backed by some margin of safety, often in terms of assets or owner earnings. The most productive assets, usually, tend to be stocks through the stock market, bonds, and real estate. A lot of people also invest in gold . Investing money, therefore, very simply put, is the process of using your money with the aim of making it grow. The popular investment options for millennials are recurring account, fixed deposit and mutual funds. Of course, there are investment myths aplenty out there that you should be wary of, but we’ve got you covered with this article that busts all those myths.
Though the words saving, and investment are used interchangeably, they are different and must be used as two distinct terms. The main similarity between these two is the quintessential role they play in your lives. The differences, however, are more. Below are a few parameters on the basis of which we can better understand the difference between the two terms.
The primary purpose behind savings is to fulfil short term or urgent requirements. So, we usually tend to save for our daily needs like purchases and for emergencies, and other adverse situations. It is therefore, of utmost importance that you track your savings, set a deadline or work on a timeline for your goals and set a value. Investing, on the other hand, is usually done with the aim of earning returns and aiding capital formation. Investment helps you build capital for your future.
Dealing with any kind of finance does involve a considerate amount of risk. However, there is a difference in the risk involved while dealing with savings and investment, owing to the nature and feature of the two. With regards to savings, if your money is deposited in a bank account that complies with all the guidelines of the RBI, and is therefore, an insured savings account, you are at minimal to almost zero risk, because these funds are insured. On the other hand, investment belongs to the brave or rather the disciplined and does involve certain risks. The risks associated with investment are much, much higher than those associated with savings. Since investment does not guarantee a return, it is possible that all or some of the funds that you invested may be lost.
Banks generally give a certain amount of interest to savings account holders on the basis of a number of parameters, but primarily based on the balance in the account. The interest earned through a savings account, however, generally tends to be lesser or lower than the interest earned through investment. Investments, most often than not, have the potential for a higher return than a regular savings account. There is a possibility that your investments may appreciate, which simply means that they may go up or increase in value, over time. This in turn, will increase your net worth, which is basically, the value of the assets that you own and then subtracting the value of your liabilities which are what you owe. In the case that you sell for a higher price than you initially invested, you will make a profit, which will give you higher returns, a facility that is not possible with savings accounts.
A savings account will enable the account holders to access their cash as and when they need it, without major restrictions. Most individuals tend to deposit their money in savings accounts to avail of this feature that helps them access their money immediately. Banks, however, tend to limit the amount of money that a savings account holder can withdraw at a time from the account. Investment, on the other hand, does not make it easy for investors to readily access their invested money. It usually takes longer to access your money, as compared to the money deposited in a savings account.
Savings accounts are generally meant to be for the short term. These accounts are opened typically, for smaller and shorter life goals, in the near future, such as saving for a large purchase or saving up for emergencies. Planning on buying that bike you read about and already love? A savings account is what you need. Investing, contrarily, is meant to be long term. Investing can help you reach long – term goals, goals that you plan to achieve in the next six to seven years or more, such as planning for retirement or paying for your child’s education.
It is crucial to remember, more so if you are just starting out with your finances that saving money should always be your priority as opposed to investing money. It is simple to understand why. Think of it as the foundation upon which your financial house is built. The reason is simple. Unless you inherit a large amount of wealth, it is your savings that will provide you with the capital to feed your investments. If times get tough and you require cash, you’ll likely be selling out your investments at the worst possible time. Remember that as a general rule, your savings should be enough to cover all of your personal expenses, including your mortgage, loan payments, insurance costs, utility bills, food, and clothing expenses for at least six months. That way, if you lose your job, you’ll be able to have enough time to adjust your life without the extreme pressure that comes from living pay check to pay check. Furthermore, any specific purpose in your life in the near future, that is five years or less, which would require a large amount of cash should be savings- driven not investment– driven. With the investment, though it is possible to get some cash in hand in a week, since, stock markets are volatile, and more so in the short-run, losing more than fifty per cent of its value in a single year, it will be difficult for you to use the money for your short term goals. Those that are just beginning with their own personal finances, must ensure that they have all these things and a sturdy health insurance in place, before they move on to investing.
Now that you’ve figured out what both these terms mean and how they work and differ, head over to this article to figure out how you can both save and invest.
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