Savings and investments are two terms that are often used interchangeably. People assume that these two financial terms are similar and there is no difference.
However, the fact is that investment is an extremely diverse concept from that of saving.
The very agenda of saving is only to take out a portion of income and store it for future emergencies.
On the other hand, investment is an asset. It is a platform that helps the person to grow their wealth. The concept of saving does not apply to investment at all.
In investment, even when you are extracting a portion of your income like saving, you are not storing it, you are devising it to generate more wealth
Here are some major difference between saving and investment:
Savings are suited for short term financial objectives. Saving some amount from your income for that wonderful camera or that expensive dress are justified.
You cannot use savings for big financial goals or long-term goals.
Investments are more suited for such objectives.
For example, you cannot buy your dream house or plan your retirement from your savings. You would need a wealth generator that offers you much higher returns to achieve such goals.
Investment are basically used for planning the future of kids, weddings, education, or retirement.
Also Read: 5 Ways to Reduce Mutual Fund Investment Risk
Savings can also be categorized as emergency funds. It is always advised to not put all your reserves in investment.
This is because investment are less liquid in nature. Some investing plans can give you high liquidity like growth stocks. But most of the investment are long term.
Which is why investment is not an ideal financial platform for emergencies.
Savings on the other hand are highly liquid in nature. They are always ready to provide you financial aid.
Savings can give you on the spot access to all your reserves, but investment will require you to wait until the maturity date of the investment plan.
This can take years. So, a person should always have some emergency fund by their side.
Risk is yet another crucial parameter to differentiate between saving and investment.
It is an obvious fact that investment carry much more risk with itself. This is why they can maximize the wealth.
Without risk, there is no guarantee of return.
While savings do not carry any potential risk with itself. A person makes reserve in the form of saving in banks.
They can put those savings in FD or general accounts and earn steady returns. But these returns are very low as compared to investment.
Investment is a risky venture because it is associated to a volatile market. The chances of earning good is as high as the chances of loosing all your money.
However, this doesn’t mean that investment can drown all your money. There are different types of investments, and you should choose according to your risk appetite.
Investment offers much higher return as compared to savings.
Savings offer you a fixed return over the period of time. For example, FD offers 4-5% return on the principal amount.
Whereas, investment can give you returns as high as 15 and 18%. But it is to be kept in mind that the risk is equally high in this venture.
The bottom line
But, despite the differences in these terms, both, saving and investment should be responsibly maintained by an earning person.
Investment might help you to maximize your wealth and achieve your financial goals, but it is to be remembered that investment is a risky venture.
You may lose some amount of your money and saving will help you cope through that phase.
The same goes with saving. Saving will not generate extra money for you. Therefore, you need investments to keep up with the economy advancement and secure your future.