Before diving into the article on the difference between investment and saving and understand what path you should choose as a way to financial freedom, you need to understand the meaning of both these terms.
Both these terms are widely used when talking about money in general and are often used interchangeably, but there is a sleek line between the two that makes them so much wide apart in their meanings. The whole concept is changed when you understand what these two are meant for. Moreover, we should engage in both to secure our finances.
Saving is piling up your money that is left over after your spending is subtracted from the disposable income earned in a given time. It can be saved somewhere safer as liquid securities that you can easily access in a short period when in need. Savings are usually meant for a short time (one to three years). It is often called the emergency money that one may set aside for contingencies or future purchases. Savings can be made in FDIC secured checking and savings accounts. Many financial experts recommend keeping a sufficient amount of cash in hand hidden somewhere that only you can access.
Investment is putting in your money to generate a return on investment (ROI) after a period. Investment is generally made for the long term (five to fifteen years). For instance, people invest in major spending in life like buying a home, or a car, for marriage, for the kid’s education, for setting up a business, or for achieving any other financial goals. True investment is often backed by some margin of safety in the form of owner earnings or assets. Productive assets like real estate, bonds, and stocks are considered the best investment options.
Key Difference between Savings and Investment:
At the end of this differentiation, you will hopefully get a clear idea about the best way to invest money.
This is the most important factor that every person should take into consideration before deciding. Savings are considered a much safer option as it involves lesser amount of risk than investment. Savings are not affected by market conditions or stock markets, while with the investments, money fluctuates every other minute or day according to the market conditions. There is always a chance that your money can go down the drain in minutes, and you can’t do anything about it. But there is also a chance to get a huge rise in investment.
Another point of difference to be discussed here is the amount of return or interest. When you invest your money, you want to make more money while the goal of savings is to keep the money safe with minimum risk; you can get a very small amount of return in savings. The saving account interest rate is very little because the main motive behind saving is to keep the money safe and secure. On the other hand, the money or return one gets on the investment made is called return on investment (ROI), and it is in a bigger percentage than savings.
You need to choose between the two. For this, you need to identify your purpose. Why do you want to save or invest the money? The next thing to consider is the duration. Are your goals long term or short term? If you are planning to keep some money aside for unforeseen situations, then savings are best. However, if you are planning to buy a house, car, or something big, then the investment is ideal. You may find investments a bit challenging at first, but the yield is worth all the risks associated. Investing smartly is the key to meet long term goals. You should find options that provide the best investment returns to invest your money. Choose wisely, because savings are for emergencies, and investment is for the future.
Deciding the time or period of your goal is important and is to be decided beforehand. If your financial goal is for five to ten years from now, investment is the best option as it can help you reach your goal easily by the specific time. However, if your goal is short term, say for one to three years, or you are planning to buy a new smartphone or plan for a short vacation, savings can be a better option for you.
5. Impact of inflation
The interest paid on savings in your account is often affected by the inflation rate; this means that you may lose some interest money in the long run. If you get an interest rate of 2% on your savings account while the inflation rate is 2.50%, it will cost you to keep your money in the savings account. Whereas, with increasing inflation, the return on investment reduces. Traditionally, ROI in the long-term stock gain is about 10% every year. Every year, inflation decreases the ROI in the long term by over 3%; here long term means that you keep your investment assets for at least one year. However, there is a very low risk of losing money in investment as they provide a higher return.
Now that we know the difference between saving and investment, the question arises, is it better to save or invest?
By comparing both these options based on all these points and factors, you can opt for any of these. However, saving is a much better option because of the low risk involved, even if you are planning to buy a house. If you are not afraid of taking a risk, you can also start investing. You will be getting more returns from the investment if you put all things together. Choose your options wisely to make your way to financial freedom.
How much should I Save vs. Invest?
If you have made your decision and chosen your path, but you have a question about the amount of money you should save vs. invest, then it is always wise to start with a safer option of saving. It is like the foundation of your financial house. Your savings will provide you with the capital that you can use for investment. During tough financial situations, you don’t want to sell your investments at the worst time to get the required cash.
You need to include two types of savings in your life:
- The savings should be enough to cover all your personal expenses like loan payments, utility bills, food, and clothing expenses, mortgage payments, and other such expenses for the next 4-6 months. This way, you will get enough time to adjust your life in case you lose your job. You won’t have to make harsh decisions like selling your assets etc. to maintain the finances during these times.
- If you have any specific goal that will require a large amount of money within the next five years, you should choose to save and avoid investing because the stock market can be extremely volatile in the short-run. You may lose about half of your investment within a year.
At the end of the day, it is your decision, and you know better what is good for you and where you should be putting your money for the future. It would seem a big task, but everyone should know how to save before earning