Difference Between Savings and Investing
Savings refers to putting or saving money aside for future use and not using it thus involving low risk and low returns whereas Investing refers to investing money in different forms at different rates for some specific period of time to earn or gain more money on the principal amount of investment and the same involves more risk and return.
An investment is an asset or item acquired with the goal of generating income or appreciation. It is the process of using your money or capital, to buy an asset that you think has a good probability of generating a safe and acceptable rate of return over time. Investments can be stocks, bonds, mutual fundsMutual FundsA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks. and, derivatives, real estate; jewelry anything an investor believes will produce income usually in the form of interest or rents.
Savings is the amount of money left over after spending from disposable income Disposable Income Disposable income is an important mechanism to measure household incomes, and includes all sorts of income such as wages and salaries, retirement income, investment gains. In other words, it is the amount of money left after paying off all the direct taxes.(DPI). Savings refer to money you put aside for future use rather than spending it immediately. Savings are done for unexpected financial emergencies. Money can also be saved to purchase expensive items that are too costly to buy with monthly income.
Buying a new camera, purchasing an automobile, or paying for a vacation can all be accomplished by saving a portion of income. There are several ways through which a person can save money like, accumulating it in the form of cash holdings, or depositing it into the savings account, pension account or in any investment fund.
Investing vs Savings Infographics
Let’s see the top differences between investing vs savings.
Step Wise Analysis of Investment vs Savings
There is a thin line of difference between savings and investment, to understand the same some step-wise analysis is given below:
- First, we have a “money surplus” situation on a monthly basis i.e. Earning more than spend.
- Then we start to have some accumulate surplus monthly or yearly till we feel secure that we have some buffer should we have an urgent need for money.
- Third as our situation improves further, we start to desire things we need to buy – maybe a bike, clothes, car or a house.
- Fourth, we start to desire (want) certain items – may be a fancy music system, a nice vacation, etc.
- Fifth, if after most of our needs and wants are fulfilled, we start looking at options to put the money left over, into areas with the intention of generating more money for us in the future.
Saving is something one does from stage 1 till 4. Investing occurs only from the 5th stage onwards.
- Savings means to set aside a part of your income for future use. Investment is defined as the act of putting funds into productive uses.
- People save money, to fulfil their unexpected expenses or urgent money requirements. On the other hand, investments are made to generate returns over the period that can help in capital formation.
- Savings do not have any risk of losing money, whereas In Investing there is a risk of losing money.
- Savings have nominal returns, whereas Investments have high returns if invested wisely.
- You can have access to your savings, anytime because they are highly liquid, but in the case of investment, you cannot have easy access to money because the process of selling the investments takes some time.
Investing vs Savings Comparative Table
|Basis for Comparison||Investments||Savings|
|Meaning||Investing Money is the process of using your money with the aim of making it grow||Saving money means putting money aside gradually, typically into a bank account for unexpected financial emergencies.|
|Examples||Investing in buying gold or investing in stocks, property or shares in a mutual fund.||Saving is done either in saving bank account or in Liquid Fund Mutual Accounts|
|Purpose||It is made to provide returns and help in capital formation.||Savings are made to fulfil short-term or urgent requirements|
|Risks||Very High||Low or negligible|
|Returns||Comparatively High||No or Less|
|Liquidity||Less Liquid||High Liquidity|
Savings, alone cannot constitute the increase in wealth, because it can only accumulate funds. There must be the mobilization of savings, i.e. to put the savings into productive uses. There are a number of ways of channelizing savings; one of them is an investment, where you can find unlimited options to invest your earnings. Although risk and returns are always associated with it, when there is no risk, there is no return.
The stepping stone of wealth formation is savings, which is decided by a person’s level of income. The higher the income of a person, the higher is his capacity to save, because the rise in income increases the propensity to save and decreases the propensity to consume. It can also be said that it is not a person’s ability to save that encourages him to save money, but the willingness to save forces him to do so.
In other words, investing is just one kind of saving. Whenever you put something aside, regardless of your hopes for the future, you’re saving. When you put something aside with the hopes that it will somehow provide a bonus to you after you set it aside, you’re investing.
This has been a guide to Savings vs Investing. Here we discuss the top difference between investment and savings with infographics and comparison table. You may also have a look at the following accountings articles for gaining further knowledge –