Savings refers to that part of disposable income, which is not used in consumption, i.e. whatever is remained in the hands of a person, after paying all the expenses. For example, Monthly income of Mr. A is Rs. 50000 and his monthly household and other expenses amount to Rs. 30000 so ultimate Savings of Mr. A, money remained in his hands, amounts to Rs. 20000 in cashor Bank savings account.
Savings are defined as the part of consumer’s disposable income which is not used for current consumption, rather kept aside for future use. There are several ways through which a person can save money like, accumulating it in the form of cash holdings, or depositing it into the savings account.
The stepping stone of wealth formation is savings, which is decided by a person’s level of income. The higher the income of a person, the higher is his capacity to save, because the rise in income increases the propensity to save and decreases the propensity to consume. It can also be said that it is not a person’s ability to save that encourages him to save money, but the willingness to save forces him to do so. The willingness depends on some factors like his concern or financial background, etc.
On the other end, Investment is the act of investing the saved money into financial products, with a view of earning profits. It indicates the increase in capital stock. For example, Monthly income of Mr. A is Rs. 50000 and his monthly household and other expenses amount to Rs. 30000 so Mr. A invests remaining Rs. 20000 in Mutual funds. Thus, Rs. 20000 is Investment and another income source for him.
For an enterprise/entity, investment implies the production of new capital goods, such as plant and machinery or change in inventories.
The process of investing money saved is known as an Investment. It could be anything, i.e. money, time, efforts or other resources that you exchange to earn returns in future. When you purchase an asset with the hope that it will grow and give good returns in the coming years, it is an investment. Present consumption should be foregone to obtain higher returns later.
The ultimate purpose that works behind the investment is the creation of wealth which can be in the form of appreciation in capital, interest earnings, dividend income, rental income. Investment can be made in different investment vehicles like stocks, bonds, mutual funds, commodities, options, currency, deposit account or any other securities or assets.
As investment always comes with a risk of losing money, but it is also true that you can reap more money with the same investment vehicle. It has a productive nature; that helps in the economic growth of the country.
Money if invested in mutual funds, will be invested in different industries and can help industries grow and ultimately Indian economy will grow and with good Industry returns, the person investing money will also grow.
Savings = Money is Idle/not invested
Investments = Money Makes more Money by generating returns
A smart way to generate Passive Income
Understand why Investing is the only way to grow Savings.
Comparison Chart
| BASIS FOR COMPARISON | SAVINGS | INVESTMENT |
|---|---|---|
| Meaning | Savings represents that part of the person’s income which is not used for consumption. | Investment refers to the process of investing funds in capital assets, with a view to generate returns. |
| Purpose | Savings are made to fulfil short term or urgent requirements. | Investment is made to provide returns and help in capital formation. Help Creating Wealth. |
| Risk | Low or negligible | Very high |
| Returns | No or less | Comparatively high |
| Liquidity | Highly liquid | Less liquid |
Savings, alone cannot constitute to the increase in wealth, because it can only accumulate funds. There must be the mobilisation of savings, i.e. to put the savings into productive uses. There are a number of ways of channelizing savings, one of them is an investment, where you can find limitless options to invest your earnings. Although risk and returns are always associated with it, but when there is no risk, there is no profit.
5 key differences between saving and investing:
1. Period
Savings are typically for small financial objectives to be met in short periods of time, say about 1-3 years! If you’re looking forward to buy mobile phone or to go on a small domestic vacation in near future, saving might be a good option to meet such objectives. On the other hand, investing is typically a long-term plan for bigger financial goals. Say you’re planning for your child’s education or wedding or your comfortable retired life which is due in about 5 or more years ahead from now, investing from now can make these goals achievable by the time of need.
2. Access to money
At time of critical need of money savings serve as handy cash. You have all the access to your money in savings. You may withdraw a part of your savings or the whole amount as per your wish but at times, you end up spending money you have easy access to. In case of investing, access to your money depends on the kind of investments you make. Mutual funds schemes require long Investment duration to generate consistent returns to beat inflation.
3. Risk
If you have savings in reputed banks your money is safer in the bank accounts than at home. Investing mediums may involve risk of possible potential returns pertaining to the term of investment or the market situations. Investing in equity market comes with an inherent risk. One might lose money if not invested in quality stocks with long term growth potential companies. Hence it is advisable to avail services of expert financial advisors. Risk in investing varies according to the channels of investments. If your money is invested in good quality companies with long term views, then short term ups and downs should not affect your outlook towards such investments. Mutual fund provides the scheme details thereby indicating the possible risk involved. Investing wisely may give returns much higher than savings in the long run.
4. Returns
If you have savings in reputed banks your money is safer in the bank accounts than at home. Investing mediums may involve risk of possible potential returns pertaining to the term of investment or the market situations. Investing in equity market comes with an inherent risk. One might lose money if not invested in quality stocks with long term growth potential companies. Hence it is advisable to avail services of expert financial advisors. Risk in investing varies according to the channels of investments. If your money is invested in good quality companies with long term views, then short term ups and downs should not affect your outlook towards such investments. Mutual fund provides the scheme details thereby indicating the possible risk involved. Investing wisely may give returns much higher than savings in the long run.
5. Choice
The right thing is to first identify your purpose. Why do you want to save or invest your money? Check whether your goals are short term or long term. It’s always wise to save money for small term goals, emergencies and casual expenses as it provides quick access. This makes it easier to meet small goals.
But in the long run, consider your changing needs, limited income sources and inflation; savings may fall short for bigger financial goals. Remember you are planning for future. It’s advisable to start investing at a young age but it’s never too late.Savings are for the present and investments are for the future. Investments are made typically for bigger financial goals which may seem impossible now but would be possible in the time to come if they are wisely planned today. Investing smartly is the key to meet such goals. To conclude, your dreams don’t follow inflation rates. It is recommended to save for small term goals but investing simultaneously may make it simpler achieve your long term dreams.
