Personal Finance

Investing Beats Savings Every Time — Here’s Why!

March 11, 2020

Investing Beats Savings Every Time — Here’s Why!

Often we find ourselves in conversations surrounding investments and savings. While we may not be aware, most of us use these terms interchangeably not realizing just how different both these activities are.

A lot of individuals who have stacked their surplus money in a savings bank account think that they are already invested. Even though saving is the first step towards investing, one should understand the difference between the two and not confuse the term saving with investing.

Wealth accumulation starts with the understanding that investing is not the same as saving. Let’s learn the key differences between saving and investing.

1. Meaning

Saving refers to that part of your income which has not been spent on consumption and personal needs. It is the money left back in your account after taking care of all your fixed and monthly expenses like rent, utility bills, food, fuel, repairs, and others.

On the other hand, investing is a part of the savings that is employed in financial products, extending but not limited to, mutual funds, gold, and others in order to earn a Return on Investment (RoI). The returns on fixed income products like FDs are earned in the form of interest on the money invested. In avenues like mutual funds, your wealth grows by way of an increase in the value of investments and dividends received.

2. Objective

While saving, you set aside a certain sum of money out of your income every month. The primary goal is to not spend all of your income in one go but to save some part of it for unforeseen events or emergencies. When you have an emergency fund, you can avoid the need to swipe your credit card and save yourself from falling into a debt trap. Saving money regularly doesn’t lead to wealth creation; you need to invest the same in some financial product in order for it to grow.

When you invest your money in financial securities, you aim to earn returns much higher than a savings bank account. You look forward to beating inflation and accumulate wealth to achieve various short term and long term financial goals like buying a car or planning for higher education, etc.

3. Period of Investment

The time period for saving varies considerably from the period of investing for financial goals. Your savings would stay in your savings account for as long as you want with the option for you to access the funds in case of any emergencies. On the other hand, for the purpose of investing, the savings may remain invested in financial products until you reach your set goal. The investment horizons for bigger goals like buying a house or planning for retirement can be as long as 15 years.

4. Risks Involved

This risk relates to the uncertainty regarding the outcome i.e. the return earned while you save vs. when you invest. Banks have been known to provide the highest levels of safety of the money deposited with them. When you hold your savings in a bank account of a reputed bank, you are bound to earn interest income at a fixed rate. The risk of not getting the interest income is very low.

However, investing in market-linked financial products like stocks or mutual funds is quite different. In this case, your investments are subject to market risk. This may cause your fund value to fluctuate in response to the movements of the stock market. That is why you should always invest in mutual funds and other market-linked securities keeping your risk tolerance in mind.

5. Returns Potential

Rewards are incidental to the risks taken by an investor. Those who take higher risks tend to earn higher returns in the long run. A bank account may be the safest place to keep your savings but you tend to earn very low returns. These returns might not be sufficient to grow your wealth or make you rich in the long run.

Conversely, investing money in the capital markets might not be as safe as a savings bank account; but you are compensated with much higher returns which helps to accomplish bigger financial goals in life.

6. Ease of Access

Liquidity is one crucial aspect that differentiates savings from investing.

Money held in an emergency fund provides you easy access to cash in times of need. In the case of long term investments like NPS and PPF, access to the invested capital is restricted and one is bound by the lock-in period. Even tax-saving mutual funds/ ELSS funds come with a lock-in period of three years, which is considered to be the shortest amongst all the other tax-saving alternatives. As an investor, your decisions should always be guided by your financial goals and investment horizon.

Conclusion

Saving is the first step towards money management and becomes imperative not just with regard to meeting emergencies but for building wealth too. While saving is important, it alone is not sufficient. For wealth accumulation and bigger financial goals, one must explore investment options that best suit their risk profile and financial objectives. It is smart to make money; it is smarter still to make your money work for you to grow your wealth.

Investing is now made simple and convenient with investment apps like Paytm Money that enable quick KYC that is completely digital and takes only minutes for users to get verified and become investment-ready. For those new to investing, the app also offers investment packs that one can choose from besides getting a free risk profile assessment done.

Investing doesn’t need to be difficult and Paytm Money has simplified the process further still.