What is the difference? Which is more important?
Saving or Investing. It’s all the same, right? Not necessarily.
They’re both critical in achieving your financial goals. They both require you to put money aside, but for very different purposes.
So, what is the difference?
Saving is where you put away small amounts of money to add up to a certain large amount to fulfill a short-term requirement. For example, as kids we used to stash away small amounts of money in a piggy bank to buy that comic book, new pair of sneakers or that cricket bat.
That is the perfect example of saving. If you notice, we never gave any thought to the interest rate we will earn or the return we will make on that money. Any money held in cash, savings account or current account is considered as saving.
Investing, on the other hand, involves committing money into an investment vehicle in the hopes of making a financial gain and make your money grow over a period of time. Putting your money in mutual funds, stocks, and gold, where the returns are not fixed, come under investments. The return depends on the companies’ performance, market condition, and general economic sentiments.
Which one should I choose?
“Savings are for the present and investments are for the future.”
The first thing is to identify your purpose. Why do you want to save or invest your money? Check whether your goals are short, medium 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, considering your changing priorities and inflation; savings may fall short for bigger financial goals e.g. retirement or saving for your child’s education.
A simple strategy to follow: firstly, protect yourself against unexpected costs and any short term requirements by building up a financial cushion so while your money is safe in an account earning marginal interest, you can also access it at any time. Once you have that financial cushion in place, then start investing money for your future. Remember, any money you invest in the market should be left there for a minimum of three years, so make sure it’s not the money that you will need anytime soon.
Savings and investments serve different purposes and follow different timelines. Nonetheless, they both play an integral part in gaining financial independence. So, remember to take all factors into account before making a decision.
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