Savings and investments are used interchangeably. They both are different, yet they are co-related. A general rule of thumb is saving should be short-term while investing should be long-term. In this article, let’s understand the difference between the two and the importance of each.
What is saving money?
Right from childhood, we are taught by our parents to save money in one or another way. It can be through your pocket money or letting you save in a piggy bank. As we grow and start earning, we learn to put aside some money in a savings plan that can be used for any kind of emergencies.
One can accumulate funds at any age, whether you are in school or at the stage of retirement. The main objective is to get instant liquidity, and you can meet the emergency expenses without any hassle. You can fulfil all your short-term and long-term goals.
For instance, if you are saving monthly Rs.10,000 for your annual family vacation, you may want to achieve a savings target of Rs.1,20,000 in nine months so that you can withdraw the amount at the end of the year.
What is an investment?
The investment allows you to buy an asset such as mutual funds, insurance, or property that generate returns over a period of time. However, it is also a risk factor. For example, if you have purchased gold, and keep it for years with an expectation of an increase in gold value, then it’s an investment.
The main objective of investment should be to beat inflation and enable you to achieve your goals. Investment begins only after you have saved money. It is beneficial if you begin early as it requires both patience and discipline. Whether you are chasing a short-term, medium or long-term goal, you must select an investment plan as per your requirements.
Importance of Savings & Investment:
- Savings money is essential so that you can fund several goals, whether it is buying a new home, purchasing a vehicle, or accumulating funds for retirement. However, saving money will not help you to beat inflation when you retire. This is where investment in retirement/pension plan becomes crucial.
- When there is a medical emergency, savings can help you pay for the healthcare expenses. But if you have invested in a health insurance policy, you don’t have to bear the medical costs as the insurance company takes care of the expenses. In unfortunate times, your health insurance policy will act as a cushion for your loved ones and help them overcome any financial crisis. This helps you save the hard-earned money that you can utilize in future.
- The growing inflation erodes the purchasing power of your money if you are only saving money. Therefore, investing your savings is important to earn better returns.
- The most important goal for any parent is to educate children and fulfil his / her dreams. Although savings can help you overcome monetary issues only for a certain period, your child’s future can be in jeopardy if you are not around. That’s why investment in a life insurance policy is important. A life insurance policy is an agreement between you and the insurance company wherein the company will provide financial security to your loved ones if the policyholder has a sudden death.
Both savings and investing are important financial habits to have. If your goal is to create wealth, it is essential that you invest your savings in suitable investment avenues.
