The delusion between finding a better recourse among savings and investment is an ancient battle.
Many people believe that both the concepts are the same as when you’re investing you’re indirectly saving money. Well, one can say that investment gets you into the habit of saving. But again, the concepts are different.
Let’s understand the difference between these two concepts-
What is savings?
The basic definition of savings is the amount of money that is saved after all the main expenses have been taken out.
For example, consider that your monthly income is Rs. 40,000. Out of that, the majority of the amount gets spends on your rent that is around 20,000. Including other expenses like electricity, groceries, internet bills you might end up spending around 10,000, Considering your other expenses with friends and family you might end up spending 6k more. and you will be left with Rs. 4,000, which is the amount leftover.
This means, out of the Rs. 40,000, Rs. 4,000 is the amount that you are saving. But the question is are you honestly saving up this amount? Are you sure you’re not using it up?
India consists of major accumulation of savings than investing that money. As per Indian express, it is said that only 2% of the population participates in equity markets directly or through mutual funds. We are believed to be more risk-aversive.
What is an investment?
Investment is nothing but a bigger aspect of savings. With savings, you just save the money, but by investing that money, you are making the saved money work for you.
Investment is done to generate more income in the future. Buy an asset today, wait patiently for the price of that asset to increase, and then sell it at a higher price. You can also borrow or lend the asset, and earn interest on it. An investment is an investment when you open up the possibility of earning future returns.
Let us continue with the original example and assume that you earn Rs. 40,000 per month, and out of that you save Rs. 4,000. Now you decide to start a SIP of 4,000 every month for say 5 years. , then the total amount you would have invested would be 2.4lacs. With a 12% return you this amount would have been 3.3 lacs. This means, your investment will give a return of Rs. 89,945.
The major entitlement here is that with the investment you are not only saving money but earning a profit on the saved money too!
How is investment different from savings?
Saving and investment go hand in hand. The two are complementary concepts and are very different.
Saving is the act of consciously not spending a certain fraction of your income. Investment, however, comes from the intention of increasing that saving amount. You simply put your money into something productive, like the stock market, instead of letting it gather dust in your bank account.
For instance, if you had just saved Rs. 4,000 every month, you would have accumulated Rs. 2,40,000 within a span of 5 years. But if you invested that savings, you will get Rs.3.3 lacs and an additional return of Rs. 89,945.
THE KEY DIFFERENCE BETWEEN SAVINGS AND INVESTMENTS:
There are various factors that distinguish between savings and investments. Let’s understand these differences-
1. RISK FACTOR
Risk is the key contributor for people to step back from investing. For people who are not risk-aversive, investing becomes quite tough. Thus, these people end up saving their money in a ‘savings account’.
Depositing money in a savings account or in Fixed deposits minimalizes the risk. Therefore, return here are very minimal. It is no where close to what returns people might have gotten if they would have considered investing as an option.
Investing is risky, which comes with the volatility of the market but with great returns. Also, there are options to mitigate and manage risks in your portfolio.
It is believed that having a purpose in life solves many miseries. Having a purpose among financial aspects is crucial too!
See, the basic purpose of savings is to have money, stocked up for emergencies. Savings money is highly liquid and thus can be used for any situation, be it a medical one or funding a party, etc. But the problem with saving is that here the money cannot grow itself. In other words, it cant work for you!
There is a human tendency that no one wishes to see their money go. But everyone will love it when it comes back with fruitful returns. The investment serves the best when it is done for a longer term as then the power of compo works immensely!