Savings and investment are two financial components that define your stability and security for the future. You have to utilise it to the right proportion based on your income and financial commitments. However, before deciding, you must understand the difference between saving and investing money to derive maximum benefits from your financial resources. Here is a detail to help you out in this regard.
What Is Savings?
Savings refers to a financial process in which you allocate a specific fund from your income and accumulate it over time for satisfying certain financial commitments in the short term or long term. Different financial instruments, such as a savings plan, let you save money for your commitments. Insurers also offer comprehensive life insurance plans with savings benefits.
For example, the Tata AIA life insurance savings plan provides a life cover and guaranteed returns on maturity. You can receive the guaranteed returns as a regular income for a defined income period.
What Is Investment?
Investment is a financial process in which you allocate funds to financial instruments such as securities to increase their value in the long term based on compounding interest rates. There are different ways to invest in the financial market to increase your wealth, such as the money market, bonds, real estate, etc.
Savings vs. Investment
Now that you have realised the meaning let us understand the difference between saving and investment to allocate the funds based on the requirement.
|The purpose of allocating funds in a savings policy is to ensure funds for a short term emergency or accomplish a specific money goal.
|The purpose of investing is capital appreciation and growing wealth in the long term.
|The fund allocated in a savings policy is not exposed to risk. It is not based on the prevailing market or economic conditions.
|Funds invested to grow wealth depends on the risk accommodated. The higher the risk, the larger the profits earned.
|Protection against inflation
|The funds do not increase in value. However, based on the financial requirement for the future and accounting for inflation, you can start saving the required funds.
|Investment funds can bear inflation and its related fluctuations. However, it is susceptible to the prevailing market conditions and the actual fund value.
|It is predominantly high and can vary based on the savings plan. However, the fund value is protected.
|Liquidity is again based on the financial instrument. While you can sell your securities anytime, the same is not possible with certain bond investments. Also, the value associated with the investment will be based on the current market conditions.
|You can determine the required returns from the savings policy and allocate funds accordingly.
|The returns are based on the prevailing economic conditions through the policy term of the investment plan.
How to Decide Between Savings and Investment?
Savings and investments are two financial instruments that provide varied benefits. Choosing an option between the two will be based on your financial commitments. For example, suppose you are the sole earning member of your family or a significant contributor to family financial expenses. In that case, you can invest in a savings insurance plan for dual benefits and ensure financial security, says Fool.com.
On the other hand, if you have sufficient financial resources to manage a short term emergency and can accomplish long term money goals as required, you can always allocate a certain fund to receive adequate capital appreciation.
Understanding the difference between investing and saving is important to add value to your money. If you want a platform to secure your financial resources for accomplishing your money goals in the future, a savings plan is ideal as it is secure, provides the required returns and is high in liquidity. On the other hand, if you prefer growing your wealth to protect against inflation (see here) and can bear a certain amount of risk, then the investment is a fair solution.