Many people, especially new investors, use savings and investing interchangeably. They are completely distinct things, carrying distinct purposes and playing different parts in your financial strategy and balance sheet. Before you embark on the journey to building wealth and creating financial independence for yourself, you should make sure you have a thorough understanding of this fundamental concept that explains the difference between savings and investment in detail.
What is saving?
The action of not consuming all your earned money and setting it on one side for any kind of future expenses and emergencies is called saving. You should be able to access these funds at any given time when in need, with almost no risk and with the least amounts paid in taxes.
What is investing?
Investing your funds suggests purchasing assets with the anticipation of gaining capital appreciation and reaching the long-term goals set for yourself. Investments generally draw capital profits and are categorized into two major categories – income investments and growth investments.
Key differences: savings vs investments
Saving and investing are two great instruments in finance that can help you attain monetary security. Let us understand the basic difference between savings vs investment and how are they both important yet distinct from each other to create a financially balanced life.
Below mentioned are some of the headers on which both investing and saving have a different standing.
Objective
The intent behind saving as well as investing is the most significant distinction between the two. Savings can be termed as a short-term goal that is majorly used for situations of emergencies and needful purchases. It can be done without much intensive research. Investments are made to reach bigger objectives like wealth building, funding your child's education, buying your dream house, and more. They often need long-term adherence and intensive market research.
Period
A savings plan helps you in meeting the smaller financial goals that you hope to accomplish in the time span of 1 to 2 years. To explain with an example, you are planning to buy a high-end vehicle for you and your family. You will have to put aside some amount regularly until you can afford the vehicle of your dreams.
Contrarily, an investment on the other hand, is something that allows you to accomplish your long-term financial objectives (5+ years in the future) - for example, paying for your ward's higher education or spending on their marriage, or creating a retirement plan for you and your spouse.
Returns
You mostly earn a fixed and regular amount of interest on your savings when you consider saving your funds in a savings account. On the other hand, investments have the possibility to generate much higher returns.
The risk factor
Savings of funds in most cases have very low or negligible risk. Saving tools like Fixed Deposits, Recurring Deposits, as well as traditional savings bank accounts will always give you steady interest in them. Whereas investments holds some risk as their value can vary as per the condition of the market and other economic situations and financial factors.
Protection against inflation
The significance of cash in a saving account tends to drop down when inflation is in its rising frame. However, investments, on the other hand, are outstanding financial products to battle inflation.
Liquidity option
Savings instruments are mostly high liquidity financial tools. Thus, they deliver you with instantaneous access to funds as and when it is required. Contrarily, investments usually offer low liquidity, so financial professionals suggest never investing in your emergency funds.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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