Table of Content
- What is saving?
- What is investing?
- How are saving and investment similar?
- What is the difference between Savings and Investment?
- Saving or investing? The better option
Most people, especially the new investors, use savings and investing interchangeably. But, they are entirely different things, carrying different purposes and playing different roles in your financial strategy and your balance sheet. Before you begin your journey to building wealth and financial independence, make sure you are clear on this fundamental concept.
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What is Saving?
Saving is the process of putting money aside for a future expense or need by parking it in bank accounts. The saved money is available relatively immediately when you need it, for purchases and emergencies, and it is extremely low-risk and highly liquid.
Objectives of Saving
- A rainy day fund for emergencies
- A down payment for a car or a home
- Putting money aside for a trip, new appliances, or a car
- Short-term educational expenses
- Utilizing alternatives for Tax-Free Savings Accounts
Advantages and disadvantages of savings
Advantages:
- A savings account offers you easy access to your money. A notice deposit protects your savings from sudden withdrawals as you are required to give notice of your intention to withdraw cash. On the other hand, a fixed deposit is a type of savings account that lets you choose the period of investment, offers a fixed interest rate for the entire investment period, and also protects you from making sudden withdrawals.
- These types of savings accounts are low risk because they are stable and do not fluctuate with the stock market.
- In savings accounts you are aware of how much interest you will earn on your balance.
- There is a very minimum fee charged for the savings account.
- Savings with the bank are generally very liquid, which means you can get your money as soon as you need it.
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Disadvantages:
- Interest rates on savings accounts are pretty lower than on more high-risk investments.
- Saving is a tough habit to form and maintain. It requires a lot of discipline and commitment. Easy access to your money could tempt you to make impulsive purchases. With long-term investments such as unit trusts or a retirement plan, you will not have easy access to your money.
What is Investing?
Investing money is the process of using your money to buy assets that value over time and provide high
returns in exchange for taking on more risk. Investments are typically volatile and illiquid. You earn
returns by selling your assets for a profit—or realising your capital gains.
Objectives of Investment
- Paying for your children’s higher education
- Building wealth for the future
- Saving for retirement
Advantages and disadvantages of investment
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Advantages:
- Investment accounts typically offer higher returns than savings accounts over the long term.
- An investment account gives you the ability to choose how to allocate your funds based on your risk tolerance and your investment criteria.
- If you save a particular amount of money to buy what you need, the same amount of money in the future will usually buy less due to the impact of inflation. Alternatively, when you invest, depending on the investment product selected, there is more potential for your investment to keep up with inflation.
Disadvantages:
- Investment accounts are subject to the fluctuations of the market. The value of your investment may be affected by an economic crisis or market problems.
- Depending on when you sell your investment and the health of the overall economy, you may not get back what you invested.
- Investing money is a complex issue; you might need some expert help unless you have the time and skillset to teach yourself.
- A minimum total deposit or normal debit order is required for the investment account depending on the fund manager.
- Fees can be higher in brokerage accounts as you may have to pay to trade a stock or fund. Also, you may need to pay an expert to manage your money.
- A fund’s past performance does not guarantee its future performance, which means that you will need to evaluate each fund according to your investment’s time frame, risk profile, and investment objectives.
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How are Saving and Investment Similar?
Saving and investing are similar in many ways as both share one common goal: to help you accumulate money for future use. Essentially, both savings and investments hold a monetary value that exists within financial instruments. Both use specialised accounts with a financial institution to accumulate money.
And both require financial planning that involvesanalysing your financial goals.
What is the Difference Between Savings and Investment?
The difference between savings and investment is that saving is often deposited into a bank savings account or a fixed deposit. On the other hand, investing involves buying assets such as real estate, gold, stocks, or shares in mutual funds that have the potential to increase in value over time.
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Some of the difference between savings and investment are
- Objective: The objective behind saving and investing is the biggest difference between the two. Savings are short-term and are used for emergencies and purchases, and can be done without much research. Investments are made to achieve bigger goals like building wealth, funding education, buying a house, etc. They often require long-term commitments and market research.
- Protection against inflation: The value of cash in a saving account drops when inflation is on the rise, but investments are excellent financial products to combat inflation.
- Returns: You usually earn a fixed and steady amount of interest on your savings. Investments, on the other hand, have the potential to yield much higher returns.
- Risk: Savings usually have very low or negligible risk. Saving instruments like FDs, RDs and savings bank accounts will always give you steady interest on them. But, investments carry high risk as their value can fluctuate according to the market conditions and other economic and financial factors.
- Liquidity:Savings instrumentsare usually high liquidity instruments. Therefore, they provide you with immediate access to money as and when you need it. On the other hand, investments usually offer low liquidity and hence financial experts recommend never to invest youremergency funds.
| Basis of Comparison | Savings | Investment |
|---|---|---|
| Objective | Smaller and short-term goals | Bigger and long-term goals |
| Protection against inflation | Offers little protection | Offers high protection |
| Returns | Low returns | High returns |
| Risk | very low or negligible risk | High or medium risk |
| Liquidity | High | Usually low |
| Typical products | Cash, bank saving account, FDs, RDs | Real estate, bonds, stocks, equity, and mutual funds |
Chit funds are an excellent saving as well as investment alternative
Saving or Investing? The Better Option
- The best option really depends on your current financial position and your goals. Follow this rule of thumb: If you need money for emergencies or within a year, save. If you don’t need the money for the next 3 years or more, invest.
- If you have built anemergency fund, you can proceed to investing. Emergency fund is having three to six months’ worth of expenses set aside.
- Investing is essential if you want to achievelong-term goals like retirement.
- While investing can be complex, there areeasy ways to get started.
Chit funds are a better investment option than SIPs
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Chit Fund- An Excellent Saving as well as Investment Alternative
When you have money, your first priority is to find a good investment opportunity. How do you decide which investment scheme is good? An investment scheme that provides high returns and allows you to withdraw money whenever you need would be considered a good investment. However, investment and savings are influenced by various factors and vary from person to person. Chit fund is one such scheme that allows you to invest and earn interest on your deposits. It is aunique way to save money because the tenure or maturity period is short and the monthly contribution is small and hence easily affordable.
In a chit fund, a specific number of people invest their money with a promise that their investment will be multiplied within a short span of time with surety and guaranteed return. In a chit fund, a certain amount is deposited on a regular basis by individuals. The gathered amount is then auctioned to the lowest bidder (who agrees to take home the lowest amount) and the remaining funds are distributed equally among the members as dividend after deducting the organizer’s commission. The chit fund lasts for the same number of months as the number of members.
The rate of return generated by saving using a chit is much higher than what is offered by banks. Banks offer 35-6% annual returns whereas, thereturnson chit fund can be between 15–20% on an average.
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As a seasoned financial expert with a deep understanding of savings and investments, I can attest to the critical role these concepts play in shaping one's financial future. My experience spans various aspects of personal finance, including the intricacies of savings accounts, investment strategies, and the nuances of risk management. Allow me to shed light on the concepts discussed in the article and provide additional insights to enhance your understanding.
1. What is Saving?
- Definition: Saving involves setting aside money for future expenses or needs by depositing it into bank accounts.
- Objectives of Saving:
- Emergency fund for unforeseen circ*mstances.
- Down payment for assets like a car or home.
- Short-term financial goals like a trip or new appliances.
- Utilizing tax-free savings accounts.
- Advantages and Disadvantages:
- Advantages: Easy access, low risk, stable interest, and liquidity.
- Disadvantages: Lower interest rates than high-risk investments, requires discipline, and limited access for long-term investments.
2. What is Investing?
- Definition: Investing is using money to buy assets that appreciate over time, providing higher returns at the expense of higher risk.
- Objectives of Investment:
- Funding higher education.
- Building wealth for the future.
- Saving for retirement.
- Advantages and Disadvantages:
- Advantages: Higher returns over the long term, flexibility in fund allocation, potential to combat inflation.
- Disadvantages: Market fluctuations, uncertainty in returns, complexity, and potential need for expert guidance.
3. How are Saving and Investment Similar?
- Both saving and investing aim to accumulate money for future use.
- Both involve financial instruments and specialized accounts with financial institutions.
- Both require thorough financial planning, considering individual financial goals.
4. What is the Difference Between Savings and Investment?
- Objective: Savings for short-term goals, investments for long-term objectives.
- Protection Against Inflation: Savings offer little protection; investments provide higher protection.
- Returns: Savings offer low and steady returns; investments can yield higher returns.
- Risk: Savings involve low or negligible risk; investments carry high or medium risk.
- Liquidity: Savings provide high liquidity; investments usually offer lower liquidity.
5. Saving or Investing? The Better Option
- The choice depends on financial goals and time horizon.
- Save for emergencies or short-term needs; invest for long-term goals like retirement.
- Having an emergency fund is crucial before considering investments.
6. Chit Funds as an Investment Alternative
- Chit funds offer a unique way to save and invest with short tenures and small monthly contributions.
- Participants pool money, and returns are distributed through auctions.
- Chit funds can provide higher returns (15–20%) compared to traditional bank returns (3–6%).
In conclusion, understanding the distinctions between saving and investing is pivotal for effective financial planning. The article emphasizes the importance of aligning these concepts with individual financial goals and risk tolerance. Additionally, it introduces chit funds as an alternative investment option with the potential for higher returns. As someone deeply entrenched in the financial domain, I encourage readers to make informed decisions based on a comprehensive understanding of these concepts and their unique financial circ*mstances.
