Saving and investing are two related strategies for achieving financial security. To save or to invest, you must forgo spending now, to build wealth for your future.
Many people, especially those who are just starting out in the investment world, confuse savings with investing. However, these two concepts are not even remotely similar, serving wholly separate functions in your overall financial plan.
It's crucial that you have a firm grasp of this idea before you set out on the path to monetary success and self-sufficiency.
What is Saving?
The term "saving" refers to the act of putting away cash in anticipation of a future need or purchase. Your savings are low-risk and very liquid, so they can be used whenever necessary for both routine and unexpected expenses.
What is Investing?
The goal of investing is to increase your wealth by taking on additional risk in exchange for a higher potential return over time. The market for investments is inherently volatile and comparatively low on liquidity.
The process of selling an asset for a profit, known as "realising capital gains," is how investors generate income.
Saving Versus Investing
Saving is a cash activity. You hold back from spending cash and instead keep it in a savings account, a certificate of deposit (CD), or somewhere in your home. The goal is to have those funds available for later use.
When you invest money, you use it to purchase another asset. Profits or income are the goals here. Investing examples include:
Investing in stocks that you believe will rise in value: When the stock's value rises, you can sell it for a profit
Investing in dividend-paying stocks: Apart from gaining from the value appreciation in a stock’s price, you can also invest to get regular dividend income from stocks
Purchasing income-producing bonds: Bonds offer lower risk by promising to return the money you invest at a certain date, in addition to providing a regular income to compensate for your money being locked in
Investing in mutual funds: You can let professionals pool money from several people, and manage it using their expertise
When to Save?
When you have a steady source of income but no liquid assets, it's time to start saving. Save up enough money to meet your expenses for at least six months. This safeguards your finances in case of any unexpected events such as an accident or job loss.
Even when the goal is to achieve something in the near future, saving is a good idea. House deposits, tuition, and wedding expenses are all examples. Saving is preferable to investing if you have less than five years to attain your objective.
It is important to note here that high-interest debt might make it difficult to save money. An argument might be made that debt should be paid off before savings are considered. However, both occurring concurrently makes more sense.
How to Pick a Good Savings Account?
Ideally, a savings account would be hassle-free and not cost anything on a regular basis. Before deciding on a savings account, think about the following guidelines:
Is this an acceptable interest rate? There is a broad range of available interest rates for savings accounts. To grow your funds faster, you should open a high-interest savings account
If you want to know what everything will cost, you can look it up. Check the involved costs for routine account maintenance
Do you have trouble getting your money out of the account or transferring it to another location? Does the area have any free ATMs?
How long until your bank account is credited with the returned funds?
Do any of the available options make administering money simpler? There are many accounts that allow for more flexible management of your savings. To better tackle your accounts, you may want to create multiple savings targets and monitor your progress independently.
When Should you Invest?
Investors should keep three things in mind before they invest:
Set aside an emergency cash fund: This cash assists you in managing the risks associated with investing. Any asset you purchase may lose value or fail to generate the expected income. Stock prices, for example, fluctuate on a daily basis. If you have another source of cash available to cover financial emergencies, it is easier to tolerate those normal ups and downs.
Calculate your investable income: If you don't have enough cash on hand, you might have to sell your investments quickly if something bad happens. Selling too soon limits your potential profit and/or income. Worse, if you sell when the value of your asset is temporarily low, you may lose money.
Pay your debts off: Paying off debt provides a guaranteed return because future interest expenses are avoided. Investing is less certain in terms of potential return and timeline. Take the safe route and pay off your high-interest credit cards before you begin investing.
Where Can You Invest?
There are numerous investment opportunities out there. Investing in stock markets is particularly appealing as you get to participate in the growth of the economy, ultimately protecting you against inflation and making you more money on top of it.
Other avenues would include bonds, real estate, mutual funds etc. A great way to invest in stock markets is by making a portfolio and diversifying your investment into different stocks so as to maintain a balance.
Check out Rupeeting if you want to invest in such portfolios. We offer themed portfolios that can help you get started in the right direction while entering the world of investing.
After you've saved up a necessary nest egg, you can stop putting money away and instead put more money into your investing. This way you can make your money work for you.
Ultimately achieving the balance between both you can gain financial stability through saving and investing. When planning for the future, it's better to save for the near term and invest for the long run.
Learn how to effectively use both to reach your financial objectives, and success will follow.