Savings and Investments are two terms that are used by each of us. Sometimes these terms are used interchangeably. Although we can call them sons of the same mother, savings and investing are the brothers of opposite traits.
In this blog, we will understand the exact meaning of Savings and Investing, their practical examples and the key differences between them.
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To understand the term ‘saving’, let us consider a simple example. Remember the money we received from our relatives back when we were kids? What did we do with it? Sometimes we would hand over the money to our parents, suggesting they return it to us whenever we would happen to need it.
That becomes an example of saving. Saving is a risk-free process. It is the process of keeping or putting some of your total money aside for future expenses or needs. The same can be achieved by depositing it in your bank accounts.
You can immediately access the money when you need it, either for purchasing something, or to deal with a financial emergency. The money parked as savings is highly liquid and is extremely low risk. Examples of savings include bank savings, fixed deposits, and cash stored in households.
A common example of investing mutual funds. And, every Indian has heard least of these terms from his parents. Investments are basically a long-term process. It is the process of utilizing your money to buy assets.
The value of these assets increases over time and provides high return exchange at the end. But if you try to access this money before it hits maturity period, you have to incur a huge loss. Thus, the money invested in an investment is often illiquid and is subject to market risk.
Though, there are different investing vehicles with different properties and terms. But all kinds share one common thing that is the earlier you start investing, the greater your benefits.
The other investment examples include investing in a children's college fund, taking a life insurance policy, education savings account, etc. Most of the investments are created to realize a goal and when done keeping important factors in mind. It definitely hit the goals.
The examples of savings include bank savings, fixed deposits, and cash stored in households. While the examples of investing include mutual funds, real estate, stocks, equity, and bonds.
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Comparison between Saving and Investing
Now let us understand the key difference between these similar yet different terms, saving and investment. The terms saving and investment differ from each other in following ways:
Though, the basic objective of both saving and investment is to assist the owner in the times of need. But savings serve short-term needs, while investments are planned to realize long-term goals of the individual.
Savings are usually deposited in a bank account or a FD account, while investments are utilized to buy an asset such as shares, gold, or stocks.
While savings can be done without much thinking or planning. If you are thinking of saving some money you can simply do it on your own without much market research. On the other hand, the investing process involves multiple and a variety of vehicles, so it becomes essential for the users to do market research before it.
Savings offer little or no protection against inflation, but investment is highly protective against inflation.
The end return of savings has no profit margins for the most times, it is equivalent to original value. On the other hand, investment offers high profit returns, in most of the cases it is quite higher than investing value.
Investments are subjected to market risk; it is involved with high or medium risk according to the requirement. While there are no, or low risks involved in savings.
The liquidity of saving is quite high, the user can immediately access the cash form of his saving, whenever required. While, investing money is illiquid and is subjected to terms and conditions depending upon the investment vehicle.
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The terms savings and investing are similar to each other in following ways:
The common goal of saving and investing is to assist the individual to accumulate money.
Both the terms hold a monetary value that exists within financial instruments.
The accumulated wealth in both the cases serves the individual in the times of need and emergency.
Both processes utilize a specific account with a financial institution to accumulate wealth.
Both savings and investing requires financial planning before exhibition.
The individual needs to choose his financial goals before starting to utilize his money in any of it.
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Saving tools or investing tools are the vehicles employed for their particular process. The examples of saving tools and investing tools are as follows:
Saving account commonly termed as your usual bank account. It allows you to park your extra money and later earn a minute interest in it.
Online accounting systems such as Discover, and CIT bank offer higher interest rates than traditional accounting systems.
A money market account is quite similar to a savings account. It gives the similar interest as a savings account and responds to inflation in a similar way. The only difference is that it requires a higher minimum balance than a savings account.
Saving bonds are generally created and issued by the government of the country. The individual has to buy a saving bond and then receive interest on the same depending upon its principal amount. Sometimes, readers get confused if saving a bond is an investment as it holds a maturity period.
Certificates of Deposits abbreviated as CDs is another saving vehicle. It too involves a maturity period, and if the user doesn’t disturb his parked money till the mentioned period, the bank returns higher interests on it.
Robo-advisors such as personal capital are the latest venture of AI in financing. These are the software that help the individuals to create a portfolio. The portfolio is specially designed according to risk tolerance and goals of the user. Though costly, it advises the users of all the flex and facilities involved in the investing process.
Brokerage accounts can be also used to purchase investments. Each brokerage has its own features and fee schedules.
In the last decade, the market has been flooded with several investing apps that help the user to invest in them, by purchasing their own coins and currencies.
In the end, we can conclude that both savings and investing are important as well as a worthy process to watch and upgrade your financial activity.
If you are confused, what to prefer, savings or investment, it is quite simple to guess. If you don’t need your money for a long time, at least for 3 years go for investing the sum, else savings is the best option for you.
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