Investment follows acts of saving. Unless you already own a huge amount of money, the only way to accumulate it is through saving.
You must be wondering what the difference between saving and investing is. Aren’t they one and the same? Actually, they’re not. They have many differences. They are correlated, of course, but not the same. We do these two for different objectives using different financial products.
In this article, we will discuss both concepts.
What is saving money?
If you restrict your expenses and keep the unspent money in your own custody for the purpose of accumulating it, is called saving money. Savings can be done at any age. Whether you’re a school-going child or a retired person, you can and must save. Its main objective is to maintain liquidity and to meet future expenses without hassle. Maintaining liquidity can help you through tough situations such as loss of employment. The short to medium term large expenses are often fulfilled by money saved.
How to save money?
Budgeting is an important tool for saving. First, you need to segregate all your income and expenses. Now, categorise your expenses as least important, important and very important to prioritise them while settling them through your income, which is limited. Try to figure out ways in which you can curtail expenses. Ensure that your income exceeds the expenses with as wider a margin as possible. The surplus fund after meeting all the expenses would be your saving. It is only after you have assured savings that you can thinking about investment.
What is investment?
Investment is buying an asset to generate returns from it over a period of time while also taking care of risk and volatility. For example, if you buy gold and keep it for years with an expectation of increase in its value, it’s an investment. Similarly, buying mutual funds, bonds, shares, properties, etc. are all various kinds of investment. Your prime focus should be beating the inflation rate with the widest possible margin.
How do we invest?
Investment starts only after savings. To invest your money, you need to focus on factors like risk, return, tenure, tax, and liquidity. It is better to start investing at an early stage of life. Once you start investing, the compounding effect starts appreciating your infused capital, gradually growing it day by day. Investment requires great discipline and patience. You can make an investment for short term, medium term and long term and also select the appropriate instrument as per your planning.
While investing, taking care of tax implications. Investment requires periodical reviewing of the portfolio as per the prevailing macroeconomic conditions. You can switch from you preferred investment assets in the future, taking into account alterations in your risk capacity and return requirements. An investor with a higher risk appetite can invest in the stock market whereas moderate risk takers can opt for mutual funds. Low risk taker can invest in instruments like bank deposits, PPF etc. The selection of the investment instrument boils down to one’s risk profile.
Which is more important: saving or investing?
Investment follows acts of saving. Unless you already own a huge amount of money, the only way to accumulate it is through saving. Once you have created a corpus, its value starts eroding due to inflation. Therefore to maintain or grow the value of your corpus, you must invest it in a higher return asset. We can say that without savings, we can’t invest, and without investment, we lose the value of saving. Hence both go hand-in-hand and are equally important.
When to switch from saving to investment
You should ascertain the savings required to meet all your expenses and uncertainties. Payments for utilities, loan instalments, credit card, rent etc. should be prioritised, as should be premium for health and life insurance. Once these are done, you get a clear idea of what your surplus is, and you can divert it into investment assets.
Things to keep in mind
While you save, don’t ignore your important expenses just because you want to grow your corpus. Make proper provisions for all your necessities. Avoid unrealistic expectations from your investments – they need time to grow. Draw a proper plan to meet your short, medium and long term goals without impacting your day to day life. For proper guidance and better results, always consult an investment planner from time to time.
The author isCEO, BankBazaar.com
