Overview:

Having a strong foundation before building the tower of financial wisdom is key and knowing the fundamental differences between savings and investing plays a major role in it. Each serves a different purpose and adds its own contribution to your financial strategy. You always invest a part of your savings and hence savings come before investing. Before moving on, an empirical difference to keep in mind is that savings are generally short term and investments are meant for the long haul. 

What do you mean by savings?

Simply put, savings is what is left after deducting the expenditures from the income. For example, Rohan’s monthly salary is Rs.50,000 and his rent is Rs.20,000, utility bills are Rs.6000 and his other expenses sum up to Rs.15,000, taking his total expenditure to Rs.41,000. If he saves his excess income of Rs.9000 and an unexpected expense comes up he will have some runway to manage that. If the expenses exceed or match the income, then Rohan is living paycheck to paycheck.

We normally save money as a buffer in case of emergencies and for purchases. The money is saved in a place, typically a savings account, which is the most basic way to save money, where the risk factor is minimal. Certificates of deposit is another savings option, essentially they are long term savings accounts wherein you put a fixed amount of money for an agreed amount of time like 5 or 10 years.  The savings are highly liquid in nature and can easily and quickly be tapped into when required. 

What do you mean by investing?

Financially speaking, investing is the act of putting money into assets and financial schemes with the expectation of generating returns over long periods of time. The return is directly proportional to the risk of losing money in an investment. It is important to invest wisely. The earlier you start investing the more beneficial it will be for you in the future. Investing in the stock market is one of the most common ways people invest their money. Stocks are typically very volatile and that means their value can fluctuate significantly. Bonds are another investment option, they are relatively safer, generally issued by corporations and governments.

It is always important to keep the risk/reward ratio in check for your investment portfolio, and one way to reduce the risk is diversification. Diversification is investing in poorly correlated assets. People invest in certain future goals like college education. There are multiple vehicles of investing, some of them are stocks, bonds, funds, and commodities. Just remember risk and reward are two sides of the same coin.

What are the differences?

The biggest and the most prominent difference between savings and investing is the risk factor. You invest hoping for a greater return as compared to just saving, but you are also at an equal risk of losing money. Saving is for short term goals like making a large purchase, whereas investing is for long term goals like planning for retirement. Any specific purpose in your life that will require a large amount of cash in five years or less should be savings-driven, not investment-driven.

Once your savings are enough to protect from any unforeseen emergency, only then does your investing begin. So which one should you select? Both. If you haven’t already, you start saving and investing. Ultimately, the savings to investment ratio depends on your financial goals and demands, your risk tolerance, and your current financial situation. Keep in mind that for both saving and investing, as the risk goes down the liquidity goes up. Time is the greatest opportunity to grow your money. It may seem like a mountain to climb but you can start small and like every successful person start by earning, spend less than you earn, and save than invest. It's really fundamental in nature and comes down to simple math.