Savings and Investments are the terms that are often used interchangeably by many people. According to them there is no difference between Investments and Savings. They suppose if they are saving the money or keeping the money in bank is same as investing. In fact I came across many people who think that FD is the best investment tool they can have. According to them, savings are like keeping the money into their savings account and investing is like keeping the money in FD.
Let me explain you the definition of Saving and Investing according to me:
Saving: It is an act of putting the money with the intention for immediate future requirement.
Investing: I would define it as creating the wealth in long term. In this, normally people invest in shares, mutual funds, bonds, ETFs, properties, gold etc. with a goal of achieving the financial gain in long run.
By the above definition it is clear that Saving is creating the emergency fund for short term needs whereas Investing is like creating the wealth for long term.
Now, let me break these terms further for better understanding:
a.) Liquidity: The basic difference between savings and investments is level of liquidity they provide. Savings are more liquid as compare to Investment. In case of an emergency a person would find it easier to withdraw money from the savings than to in case if the money was invested in shares, bonds, ETFs etc because they are believed to be acting as an asset for that person. But, with the advancements of technology, investments also offer some extent of liquidity like in case of mutual funds or share market one can get money in 2-4 working days. Still, I would recommend people to keep investment as their assets so it can act as a wealth creation tool.
b.) Risk and Reward: Risk and Rewards are best friends. If you want to earn good profit or want to build wealth then you need to take risk and have to invest. You may happen to lose some money in investments which might not be the case with savings; as savings are pretty safe bet which assure that they keep your principle money safe but the returns in savings are very less. So, on the basis of your requirement you have to define where you want to keep your money.
c.) Timeline: As described above, if you are looking for short term goals then you should go with the Savings whereas if you want to build wealth keeping a long term perspective then Investments are the best option. You can also keep aside an Emergency Fund for your short term goals by defining the certain amount and recharge it with money when it goes below that amount; so it will give you freedom to invest for building the wealth.
So, one can easily understand now that to saving and investing are Two Faces of Coin and you have to keep both these faces working for you.
If you have something to add, Please post your thoughts in comments. I would love to hear from you.
Happy Investing!!
