Savings vs. Investments: Which is better?

Hardly anyone has enough money these days to get by comfortably, yet almost everyone understands that saving money is crucial for a stable future. So you make lifestyle changes, cut down on luxuries and forego things you love to do, just to deposit a few thousand rupees into a savings account each month. 

But as you watch it accumulate and grow at a snail-like pace, you probably wondered to yourself whether the meagre interest is worth it. All those long hours you slaved away at the office or at your business, all the missed opportunities and sacrifices you made just to add some money into your savings account, year after year, only to watch depreciation eat away at your little nest egg. Ten thousand rupees worth of savings will not be worth much in ten years but it could have made a significant difference in your life today. Yet, you still do it even with the nagging knowledge that savings never made anyone rich and that you are probably stuck in this cycle for the rest of your life.

What if there was another way? A better way you could use your money to make more money for you that’s not just savings. One where your lifestyle sacrifices of today could actually grow into a sizable amount that’s worth it, and not just in twenty or thirty years but in just a few years.

Say hello to investments and investment accounts.

What are Savings and Investments?

Far too many people use the terms savings and investment interchangeably, when that is not at all the case. Savings and investments are two completely different ways you can utilise your money without spending it on perishable purchases.

Savings

Savings can be defined as storing your saved money into a very secure savings account or schemes. It always remains in the form of liquid cash which, ideally, you can take out fairly soon in case you need the money. It includes savings accounts, treasury bills and sometimes (but not always) money market funds as well. Savings are usually held in banks or other financial institutions, and account holders are able to deposit, withdraw and transfer money very easily and without any restrictions at any time.

Investments

On the other hand, investment is utilising your money to buy or build an asset that will ideally generate more money for you in due course. Most of the time, investment means that your money will not be easily liquidated which means that you will not be able to easily withdraw your investment whenever you want. Examples of investing can be building a business, real estate, stocks or bonds. In simple terms, an investment can be considered any instance where you put your money in an asset or venture today, in the hopes it will generate more income in the future.

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What is the difference between savings and investments?

There are two main differences between savings and investments: returns and risk.

Savings accounts tend to have lower interest rates and returns, whereas a smart investment can prove to be very lucrative either in the short-run or the long-run. Many people have become millionaires overnight through careful money market investment strategies and tactics. At the same time, many millionaires have also become bankrupt all of a sudden through poor investments in the money market. This is the other difference between savings and investments. Savings accounts, although with lesser returns, also have much lower levels of risk. You needn’t worry about the safety of your money unlike with your investment accounts, as savings accounts are mostly insured by government organisations and your money is extremely secure.

Another difference is the ease of withdrawal. More often than not, investments tend to be more rigid and are not liquidated whereas savings accounts have no such restrictions (transactions can be made 24/7 with passbooks, ATM/debit cards and online banking).

Are Savings or Investments better?

Investment accounts offer high risk and high returns, while savings accounts promise low risk and low returns. Neither is necessarily better than the other, but putting all your eggs into one basket is never recommended. You should always start by saving money and once you have reached a comfortable amount, you can look at investing a portion of it into various avenues. Money markets tend to be extremely volatile so putting your entire investment in the money market is also inadvisable. Diversify your investments into various streams and pay close attention. Do not rely on your investment money in times of need, and only pull out your investment when it’s at its peak so that you walk away with maximum benefit.

While the temptation to create an investment account and jump blindly into a well-performing money market might be high, taking that first step towards investing your hard-earned savings doesn’t come easy. When investing, make sure not to take any rash decisions and never touch your savings that should ideally cover all your expenses for at least six months. A well-thought out mix of savings and investments could very well put you on the path towards long-term financial success, and that’s never a bad thing.

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