What’s the Difference Between Savings and Investment?

Savings and investment are two basic concepts that build the foundation of finance. Yet some people confuse them and use them interchangeably.

Although they share the same characteristic of being important in securing your financial future, there are some differences you should be aware of. Today, we will explore both topics in detail and guide you on when to save and when to invest!

What is Savings?

Savings refers to the additional money set aside for future emergencies or purchases. When you learn to save money, you can lead a financially disciplined life because you form the habit of holding it till you feel the extreme need to spend it.

While for our parents and grandparents, the thought of saving for their future generations has led them to never touch their savings; it has been the opposite for us. We love to keep the concept of “You Only Live Once” (YOLO) as our ultimate goal. And, omitting a financial hiccup never crosses our minds because we are comfortable in living the way we are in the present.

We often tend to think saving money refrains us from using it altogether, but that’s not true. Saving does not mean you have to turn stingy. Indulging in a shopping spree once in a while is perfectly fine. Saving means becoming frugal – learning to carefully handle money. It means you make yourself disciplined enough to save at least 20 to 35% of your monthly salary to create an emergency fund that can support you during a financial crisis. But how do you know you have saved enough? You must ensure your savings account has at least three to six months’ worth of your salary! That’s how you know you are prepared for a financial crisis. And with the several popular saving options in India, everyone can save at every stage of their lives, no matter their financial situation!

Benefits of Savings

Saving your hard-earned money comes with plenty of advantages. Firstly, it acts as the perfect safety net during a financial crisis. Moreover, you avoid spending unnecessary money and create discipline.

  • You are flexible in choosing the way you want to save. For example, a recurring deposit savings account gives you easy access to money whenever you need it. On the other hand, a fixed deposit allows you to choose an investment period and offers a fixed interest rate on it. You cannot withdraw money before the investment period ends, encouraging more savings. The several different types of savings accounts help you save within your own terms and conditions that suit your needs.
  • Savings accounts are low-risk because they do not fluctuate like the stock market.
  • You will be aware of the interest rate you earn annually or quarterly on your savings in a savings account.
  • Digital savings account like Freo Save provide zero balance requirement – you don’t have to pay anything if your account does not hit the sufficient balance target.

Drawbacks of Savings

Despite having lots of perks, there are some drawbacks, like:

  • Forming the habit of saving is not easy. It requires dedication and commitment, and you must curb the constant temptation to buy impulsively.
  • With a fixed deposit or retirement savings account, you won’t have easy access to the money you are saving until the period ends.
  • Interest rates on savings accounts are quite low. However, Freo Save can eliminate this problem!

Freo Save is India’s first digital savings account that lets you earn up to 7% interest rate on your savings yearly – that’s the most you can get in the current market!

Open Your Freo Save Digital Savings Account Now!

What is Investment?

Investments include investing your money in buying assets that add value over time and produce high returns in exchange for the risk you take. Best investment options often depend on your requirement. For example, if you have a diverse portfolio, investing in a low-risk and high-return investment option is better, and if you are looking to diversify your portfolio, investing in a high-risk and low-return option is better.

Benefits of Investment

  • Investments have high returns and work for the long term.
  • When you save money to purchase something in the future, the same amount will lose some of its value because of inflation. But investment, depending on the product you invest in, will catch up with inflation.
  • You can allocate your funds based on the risk you want to take and the return you expect.

Drawbacks of Investment

While investments allow higher returns than a savings account, they also possess equally higher risks. Other disadvantages of investments are:

  • A minimum deposit is required for your investment account to work.
  • The investment product’s past performance can never predict the way it will function in the future. You will need to study the fund’s risk profile, time frame and objectives.
  • They are subject to fluctuations in the market and the return value will likely get affected by any market problems or economic crisis.
  • Investing is a complex topic; if you are a beginner, you will most likely need the help of an advisor.
  • Sometimes you won’t get good returns compared to what you invested due to the economy’s health or the time you sell your investment.

Difference Between Savings and Investment

The main difference between savings and investment lies in their procedure. Savings gets deposited in your bank’s savings account or fixed deposit, while investing requires you to buy assets like stocks, bonds, real estate or gold with the hope of increased value over time.

Here’s a table that helps you summarise the main points of difference between savings and investment:

Characteristics

Savings

Investment

Account Type

Bank

Brokerage

Typical Products

Savings Accounts, Money-market Accounts, CDs

Bonds, Stocks, ETFs and Mutual Funds

Risk

None on DICGC approved accounts

Depends on the investment

Return

Low

Depends on the investment

Protection Against Inflation

Low

High

Liquidity

High, excluding CDs

High

Expensive

No

Depends on the investment

Time Frame

Short-term

Long-term

 

Savings vs Investment – Which One is Better?

Neither investment nor savings is better in every situation. The decision to choose between savings and investment entirely depends on the market, your requirements and current financial position. Here are some points that can help you decide better whether you should be saving money or investing it.

When to Save?

  • If you don’t have an emergency fund, you need to begin saving before investing
  • If you are currently repaying a high-interest debt, work on saving money rather than investing a chunk
  • It’s better to open high-yielding digital savings account if you think you will need money in the next few years

When to Invest?

  • You have reached a stage where you are comfortable taking financial risks and are sure you won’t need a huge sum in the upcoming years