When your money grows – what does this mean? Does it mean you saved up through a plan or chose an investment plan to invest in? What would be the right answer? There is a lot of confusion between investment plans and saving plans. So, this post is going to be talking about the differences between the Savings schemes and investment schemes that you see out there.
Saving and investing are both crucial concepts for establishing a strong financial foundation, but they are not synonymous. The most significant distinction between saving and investing is the level of risk taken. Saving often leads to a lesser return but with almost no risk. Investing, on the other hand, gives you the possibility to make a bigger return while also exposing you to the danger of loss.
Here are the fundamental distinctions between the two – and why you need both to help generate long-term wealth.
Distinction Between Savings Plans and Investment Plans
Savings Plans vs Investment Plans depends on these following factors:
a) Capital
Savings might come in handy in times of need, such as a medical or financial emergency. You can simply access or use the money you’ve been putting aside for a long time or in money saving plans.
Depending on the types of investment alternatives you choose, you may lose this rapid and easy access to your capital when you invest.
For example, investing in open-ended equities mutual funds allows you to redeem your investment at any time. The same cannot be said with ELSS, which has a three-year lock-in term.
b) Risks
Another key distinction between investing and savings influences an individual’s financial decisions. The lesser danger of losing money is one reason why people retain their money in bank accounts. When you go the savings way for financial planning, there is no danger associated.
Investing money, on the other hand, may include a variety of risks. It is concerned with the potential loss of money or the potential return on your assets as a result of market conditions. This risk aspect is what distinguishes a savings strategy from an investing plan.
The danger of investing money varies depending on the financial instrument used. Direct equities, for example, have a different risk factor than equity mutual funds. It is critical to invest prudently in order to balance the risk-to-return ratio. That is why people seek the advice of financial consultants when it comes to long-term financial planning.
c) Purpose
Another significant distinction between savings and investing plans is the reason or goal for which they were chosen. Savings are intended for achieving minor goals in a short period of time. For example, if you wish to take a foreign trip with your spouse in two years, saving a small sum each month can easily help you achieve this objective.
While following a long-term plan to accomplish larger goals, investments play a crucial role. A good example is a child’s further education planning. The idea is to have enough money saved up till a tiny child decides to pursue higher education. Investing money for this purpose is a superior option because your money will grow over time.
Merits and Demerits of Investing
Pros:
- Stocks, for example, can provide substantially larger returns than savings accounts and CDs. However, this can vary substantially from year to year.
- Investment products are typically extremely liquid. On practically any weekday, stocks, bonds, and ETFs can be easily converted into cash.
- If you have a well-diversified stock portfolio, you can easily outperform inflation and boost your purchasing power over time. The Federal Reserve’s current target inflation rate is 2%, but it has been significantly higher during the last year. If your return is less than the rate of inflation, you will lose purchasing power over time.
Cons:
- Returns are not guaranteed, and it is possible that you will lose money in the near term as the value of your assets changes.
- You may not get back what you invested, depending on when you sell and the state of the overall economy.
- You should leave your money in an investment account for at least five years in order to weather any short-term downturns. In general, you’ll want to keep your investments for as long as possible, which means not touching them.
- Because investing can be complicated, you should certainly do some research before you begin, but once you get started, you’ll see investing is achievable.
- Brokerage accounts may have additional fees. However, many brokers now provide free trading.
Merits and Demerits of Saving
a) Pros:
- Savings accounts inform you how much interest you’ll earn on your money upfront.
- The Federal Deposit Insurance Corporation insures bank accounts up to 2,50,000, so even though the rates are lower, you will not lose money if you use a savings account.
- Bank products are normally fairly liquid, which means you may obtain your money as soon as you need it, though you may be charged a penalty if you withdraw money from a CD before it matures.
- There are no hidden costs.
b) Cons:
- Returns are low, which means you could make more by investing (although there’s no assurance).
- Because the returns are minimal, you may lose purchasing power over time as inflation depletes your funds.
Savings, by themselves, cannot contribute to a growth in wealth because they merely accumulate funds. Savings must be mobilized; that is, they must be put to productive use. There are several ways to channel savings – one of them is an investment; in it, you can find endless opportunities to invest your profits. Since risk and return are always related to it, there is no profit if there is no danger.
As excess of anything is undesirable, so is an excess of saving and investment, i.e., it is critical for an economy that savings and investment be made in the proper proportion. Unemployment will result from a surplus of savings over investment, and if it is kept, inflation may ensue.
Conclusion
To save or invest – could confuse a lot of people. Although it is a major confusion among people, what should not be confused is the difference between the two. Hoping this article cleared all your doubts, and also what would be the best-chosen option for you.