Many new investors use these terms interchangeably. However, they have completely different roles in
your financial plan.
Savings is the process through which you keep funds aside from your income for the
proverbial rainy day. Typically, in cash, these funds come handy during emergency expenses or
even certain planned expenses (small amounts) in the near future.
Investment, as defined above, is the process of purchasing an asset today with the
hope that it will provide regular income or appreciate in value in the future. The funds
invested may / may not be available during the times of need (depending on the investment option
chosen).
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.
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