Art & Science of Saving & Investment

Savings V/S Investment_CashRich Surojit

The purpose of writing this article is simply to make you understand the basic difference between savings & investment and what are the mechanism we should apply while start savings & while planning for an investment. Savings and investments are two important financial concepts, but they serve different purposes in creating and managing wealth. I as a common man took a bit longer to understand the basic difference between these two concepts one is SAVINGS and another one is INVESTMENTS. Both serves different aspects of life. Here's a brief overview of these two:

A) Savings - Savings are generally of short-term by nature. First of all we need to understand the Purpose of savings, the Liquidity aspects of that and the Risk factors that are involved in it.

    Purpose: Savings are typically made to cater short-term goals and emergencies. The primary purpose of saving is to create a contingency fund.

    Liquidity: Savings are highly liquid and easily accessible in nature and you can withdraw money from your savings account as and when it is needed.

   Risk: Savings accounts are of very low-risk because they are often backed by government guarantees, hence the value of your savings doesn't fluctuate with market conditions.

B) Investments - Investments demand comparative a longer period of time before harvesting. First of all we need to understand the Purpose of Investment, then the Liquidity factors that are involved in it and last but not the least the Risk factors should be analysed before commencing any investment. Let us check these one by one:

   Purpose: Investments are intended for long-term growth and to potentially generate a return on your money through compounding mechanism. The goal is to increase your wealth over time. The longer you stay invested, the higher the compounding effect is.

   Liquidity: Investments, such as Stocks or Real estate are less liquid than savings. Selling these assets might take time, and there is a potential for loss if sold during a market downturn. The quantum of profit or loss is depending upon the timing of entry and exit in the market / investment.

   Risk: Investments carry varying degrees of risk. While they offer potential higher returns than savings, there's also the risk of loss, especially in more volatile markets. It is advisable to always take advice from certified and trusted advisors before starting any investment.

Key Differences in between Savings & Investments:

Returns:

Savings typically offer lower returns compared to investments. The interest earned on savings accounts may not keep pace with inflation which means, the purchasing power of your money might decrease over a period of time.

Investments have the potential for higher returns, but they also come with greater volatility and risk. But it is also true that the longer you stay invested, the higher you gain. 

Time Horizon:

Savings are suitable for short-term goals and emergencies, where you may need quick access to your funds, like medical emergencies etc.

Investments are more appropriate for long-term goals, such as retirement or building wealth over several years or legacy creation etc.

Risk Tolerance:

Savings are considered low-risk, making them suitable for individuals with a low risk tolerance.

Investments involve varying levels of risk, and individuals with a higher risk tolerance may be more comfortable with the potential ups and downs in the value of their investments.

Balancing Savings and Investments:

We recommend maintaining a balance between savings and investments based on individual's financial goals, their risk tolerance, and time horizon. Having an emergency fund in savings while also investing for long-term goals  be should be a prudent approach to financial planning. 

While planning for an investment, we should keep certain things in our mind:

a) Your Purpose of investment should be crystal clear.

b) Time horizon of the Investment i.e. after how many years you need the Corpus to meet that Purpose.

c) Finalize the amount of Corpus you will need.

d) Once your Purpose, Time horizon and Corpus amount is finalized, now it is the time for choosing the Investment tools to build that Corpus.

e) Tools may be of different types like Mutual Funds, Stocks, Real Estate, Gold etc. and we can choose it according to our choice, pocket and expertise.

As we have discussed earlier on the liquidity aspects, here comes the liquidity factor in action while choosing the asset class for investment. Before investment we should ponder over the Risk & Liquidity factors individually and then take a wise decision.

Best Wishes,

Surojit Malakar,

www.surojitcashrich.in