Many new investors use these terms interchangeably. However, they have completely different roles in your financial plan.
Traditionally, people are tuned by their families to save money for the future. However, not many families have a history of investments which makes it a second choice. However, merely putting funds aside without investing them can be counterproductive for a variety of reasons:
- Inflation – An inflation rate of 10% means that if you save ₹100.000 today, then after one year it will be worth ₹90,000 only. Saving without investing can eventually lead to a shortage of funds in the future when you try to use your savings. Many investment options offer returns factoring in the rate of inflation.
- Small expenses corrode the savings – Liquidity is good for emergency expenses. However, having access to funds at all times can lead to unnecessary small-ticket expenses which can eventually eat into your savings.
- Ill prepared for big-ticket expenses – Savings are good for short-term and small-ticket expenses. But for large-ticket expenses like children’s education or retirement planning, investments are a must.
The biggest benefit of savings is the liquidity it offers. By defining your investment objective to include a certain amount of liquidity, you can get the best of both the worlds. Savings come first, but it is investment that can help you build a future on the foundation provided by savings.