Many financial experts say that saving alone is not enough to create wealth; you must invest. Although saving and investment are often considered the same, they differ.
On this page, we will explore the differences between them. Is saving or investing better for creating wealth? This story will help answer this question.
Saving and investing are essential in a comprehensive financial strategy and offer different benefits. For new earners, it’s necessary to understand the difference between savings and investment, how much to save, and when to invest.
What is savings? Saving means setting aside a portion of your income without spending it. This money can be used for short-term financial goals, such as setting up an emergency fund, planning to buy a house, or preparing for unexpected expenses. Savings are generally kept in low-risk investments like savings accounts and fixed deposits.
What is investment? Investment involves putting money into financial instruments for a period of time to generate returns and increase wealth.
Compared to savings, investments carry more risk but also have the potential to provide good returns in the long run. Common investment instruments include stocks, bonds, mutual funds, and real estate.
Tax benefits: Investing in financial instruments can result in good returns and potential tax exemptions.
Compounding returns: One of the benefits of investing is the ‘compounding effect,’ where income on the investment increases in the form of compound interest. This is especially beneficial for long-term investors.
Investing at an early age: Starting to invest at an early age can provide financial support and help in planning for future expenses such as buying a house, funding children’s education, and post-retirement plans.
The difference between savings and investment: Savings are useful for short-term goals like emergency funds, while investments are best suited for long-term goals such as retirement or purchasing property.
Savings can be used with a shorter tenure, while investments require a longer period to weather market fluctuations and earn good returns.
Why is the risk higher? Savings are relatively low risk, while investments in financial instruments carry high risk due to market volatility. These investments can sometimes lead to losses but potentially offer high profits.
Return on investment: Savings accounts and fixed deposits usually provide 3-4 percent per annum returns, whereas stocks, mutual funds, and real estate can offer much higher returns, sometimes 10-15 percent or more, depending on market conditions.
Savings vs. Investment—Which is Better? Choosing between savings and investments depends on your financial goals, time frame, and risk tolerance.
Savings provide economic security and easy access to cash for short-term needs and emergency funds.
For long-term financial goals, investments, though somewhat risky, offer the potential for high returns. This emphasizes the importance of striking a balance between saving and investing to create wealth and financial security in the future.