Tuesday, December 12

Should I Invest or Save? What’s The Difference by The Way?

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               Going the dictionary way, investment is simply ‘Property or another possession acquired for future financial return or benefit’ and I hope you already know what savings is. Although totally different in meaning and implementation, these words are often used interchangeably often unknowingly and due to lack of proper knowledge. For most of us, those years in schools and colleges have passed thinking of getting a good job after studies that can yield them good monthly income and financial security. Obviously, most of us didn’t think or hear about investment and saving simply because we were not having any income at that time. But what surprises me, is the fact that all those 20-25 years of being a student has not taught us anything about finance (of course, if you were not a finance student) which is going to be the back bone of rest for rest of our life.  No one ever taught us about it. Naturally, when we started getting our salaries, most of us, unfortunates blew them up without having a second thought. Few months or years pass by and slowly we start hearing, reading and learning more about money and its management. Finally, we start thinking about saving our hard earned money or investing it.

                Now, one of the most confusing parts of finance for new comers is the difference between investment and savings. I would like to clearly separate out the meanings of the words ‘investment’ and ‘saving’. The general perception is that saving and investing are one and the same while there is a very big difference between the two terms. While saving your money, you are keeping it with you – it does not grow. It may even start losing its value because of inflation. Whereas, in investment, the money in spent on something which can give you more money in the future. If you don’t know what inflation is or to learn more about inflation, have a look at ‘What is Inflation?

                To make things clear, putting your money in savings bank account (SBA) is saving and putting it in bank fixed deposit (FD) can be termed as investment. The money in savings account will remain as it is, while in fixed deposit you will get interest on that amount and so you get more money when the FD matures. Now the FD part is theoretically correct but not in actual world due to the effect of inflation.

Although banks provide interest for savings account, it is too low to curb the effect of inflation. In India, RBI has directed the banks to provide an interest rate of 3.5% for savings account while the inflation based on Consumer Price Index (CPI) is above 9%. The loss is evident from the numbers. Thus, use of your money in such a way that it can beat the inflation and give more returns can be termed as investment. Fixed Deposits can be called investment only if it provides interest rate above 9% in above case.

                I explained the difference above in layman’s way and hope you have got a taste of those words. Let’s look at the table below for the exact differences.

Savings

Investments

For

Short term holding

Long term or life time holding

Returns

None

Yes

Time

Short

Long

Risk

Almost nil

Varies but unavoidable

Capital Growth

None or even depreciate

Yes

Liquidity

Very high

Very Low

Interest rates

None or very low

Generally high

Capital Required

Low

Generally high

Methods

Savings account, saving schemes, certificates, etc.

Stocks, business, mutual funds, real estate, etc.

                Many think that they have invested their money while they have actually just saved it and many people invest money thinking that they are saving it. For example, if a person who wants to save his hard earned money (pay be the money he got when he retired) puts all his money into mutual fund, he has invested his money unknowingly and investments come with their share of risks. No one will ever like to put his life’s earning into risk. On the other hand if a person wants to invest and puts all his money in buying gold, he is just saving his money against inflation. Investments should never be done without proper understanding of factors like risk, return on investment, minimum time required, etc. Patience, time and knowledge are your assets and you should know how to manage them to be a successful investor.

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