THE DIFFERENCES BETWEEN SAVINGS AND INVESTMENT

You’ve probably wondered what the difference between savings and investments is. Many people confuse them for the same thing. Here is everything this article will explain about them:

What are Savings?

Savings is the amount of money left over after spending and other obligations are deducted from earnings. Savings represent money that is otherwise idle and not being put at risk with investments or spent on consumption. Savings accounts are very safe but tend to offer very low rates of return as a result.

Savings are all about putting money aside. We advise you to save about 20% of your monthly income. This money can be towards future purchases and emergencies that may arise

Savings are usually easy to access when they’re needed. In cases where your savings are in the form of fixed deposits, you may not be able to withdraw as you wish. The interest rates on savings accounts vary but with Green Mustard technology, we offer competitive returns that can be as much as 3x your bank’s offering.

Your “savings” are usually put into the safest places, or products, that allow you access to your money at any time. Savings products include savings accounts, checking accounts, and certificates of deposit. Some deposits in these products may be insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. But there’s a tradeoff for security and ready availability. Your money is paid a low wage as it works for you. After paying off credit cards or other high-interest debt, most smart investors put enough money in a savings product to cover an emergency, like sudden unemployment. Some make sure they have up to six months of their income in savings so that they know it will be there for them when they need it.

What are Investments?

Unlike savings, investing is purchasing assets that may increase in value. These assets could be stocks, bonds, mutual funds, or even real estate. They can also earn you a return on investment. The main aim of investments is to use capital to generate a substantial financial gain.

Investment is essentially an asset that is created to allow money to grow. Financially speaking, an investment means an asset that is obtained to allow it to appreciate over time. Investments are usually aimed at accomplishing long-term goals. They also allow you to diversify and have different assets in your portfolio. When you “invest,” you have a greater chance of losing your money than when you “save.” The money you invest in securities, mutual funds, and other similar investments typically is not federally insured.

You could lose your “principal” — the amount you’ve invested. But you also have the opportunity to earn more money. Investment most times tend to be risky when you make the wrong investment or when you invest with the wrong investment company. All investments involve taking on risks. You must go into any investment in stocks, bonds, or mutual funds with a full understanding that you could lose some or all of your money in any one investment. While over the long term the stock market has historically provided around 10% annual returns (closer to 6% or 7% “real” returns when you subtract for the effects of inflation), the long term does sometimes take a rather long, long time to play out. Those who invested all of their money in the stock market at its peak in 1929 (before the stock market crash) would wait over 20 years to see the stock market return to the same level.

However, those that kept adding money to the market throughout that time would have done very well for themselves, as the lower cost of stocks in the 1930s made for some hefty gains for those who bought and held over the next twenty years or more. It is often said that the greater the risk, the greater the potential reward in investing, but taking on unnecessary risk is often avoidable. Investors best protect themselves against risk by spreading their money among various investments, hoping that if one investment loses money, the other investments will more than makeup for those losses. This strategy, called “diversification,” can be neatly summed up as, “Don’t put all your eggs in one basket.

Diversification can’t guarantee that your investments won’t suffer if the market drops. But it can improve the chances that you won’t lose money, or that if you do, it won’t be as much as if you weren’t diversified.

What is the difference between savings and investments?

There are quite a few differences between savings and investments:

Period:

Savings are typically for small financial objectives to be met in short periods, say about 1–3 years! If you’re looking forward to buying a mobile phone or going on a small domestic vacation in near future, saving might be a good option to meet such objectives. On the other hand, investing is typically a long-term plan for bigger financial goals. Say you’re planning for your child’s education or wedding or your comfortable retired life which is due in about 5 or more years ahead from now, investing from now can make these goals achievable by the time of need.

Access to money:

At times of critical need of money, savings serve as handy cash. You have all the access to your money in savings. You may withdraw a part of your savings or the whole amount as per your wish but at times, you end up spending money you have easy access to. In the case of investing, access to your money depends on the kind of investments you make. Open-ended equity mutual funds schemes allow you to redeem your investments at any time. If the investment period in the equity mutual funds scheme is more than one year the capital gain is exempted from tax liabilities.

Risk:

If you have savings in reputed banks your money is safer in the bank accounts than at home. Hence the risk of losing money in savings is very low compared to any investments. Besides this, your savings are also entitled to interest. Investing mediums may involve the risk of possible potential returns about the term of the investment or the market situations. Investing in the equity market comes with an inherent risk. One might lose money if not invested in quality stocks with long-term growth potential companies. Hence it is advisable to avail services of expert financial advisors. Risk in investing varies according to the channels of investments. If your money is invested in good quality companies like “Green Mustard Technology Limited” with long term views, then short term ups and downs should not affect your outlook towards such investments. A mutual fund provides the scheme details thereby indicating the possible risk involved. Investing wisely may give returns much higher than savings in the long run.

Returns:

In case you invest in bank fixed deposits, on average, you may earn interest up to about 8–9%. Interest in savings accounts is often much lower. However, investments in equity-based mutual fund schemes carry a much higher potential for long-term value growth. Quality investments have higher potential returns than regular savings if compared for a long term of about 5–10 years.

Choice:

The right thing is to first identify your purpose. Why do you want to save or invest your money? Check whether your goals are short-term or long-term. It’s always wise to save money for small-term goals, emergencies, and casual expenses as it provides quick access. This makes it easier to meet small goals. But in the long run, consider your changing needs, limited income sources, and inflation; savings may fall short for bigger financial goals. Remember you are planning for the future. It’s advisable to start investing at a young age but it’s never too late. Savings are for the present and investments are for the future. Investments are made typically for bigger financial goals which may seem impossible now but would be possible in the time to come if they are wisely planned today. Investing smartly is the key to meet such goals. To conclude, your dreams don’t follow inflation rates. It is recommended to save for small-term goals but investing simultaneously may make it simpler to achieve your long-term dreams.