Saving or Investing: Which is right for you?
Whether you've just finished college and are experiencing your first taste of the working life or a seasoned professional, it's never too early to begin thinking about the future. With the cost of living not getting any cheaper any time soon, merely running on what you earn isn't enough. Letting your money grow is imperative to ensuring a comfortable future.
Some may see saving and investing as two sides of the same coin. While it's true that both are important for setting up a stable financial future, there are certain, key differences.
Sure, both can help pad your future. Saving is generally considered a safer option but with that safety comes lesser returns. Investing, on the other hand, entails a bit more risk, depending on the type of investment, but there's more to gain too.
it's important to know which suits you better, as per your goals and lifestyle. With that being said, let's delve a bit deeper into learning about the differences between saving and investing.
Similarities between savings and investments
Both saving and investing involve putting some of your money away to help it accumulate.
To that end, both require their specialized accounts with financial institutions. For saving, you have to open an account at a bank. For investing, you can open an account with an investment broker or get a brokerage account to buy and sell stocks, bonds, mutual funds and even gold investing.
Both savers and investors ensure they have adequate funding in their bank accounts before tying up a sizable chunk of their money in saving or investing. This is because of unexpected expenses such as emergencies.
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Differences between savings and investing
Most people think saving and investing are the same thing. While they do share similarities, as we've covered, there are key differences, mainly to do with the type of assets involved.
Saving primarily involves bank products such as savings accounts, fixed deposits and even public provident funds (PPF). Meanwhile, when it comes to investing, you deal with stocks, bonds, mutual funds and exchange-traded funds.
Advantages of saving
- With bank products being quite liquid, you're usually assured of getting your money when you need it. A slight penalty might be applied in some cases.
- You know upfront the amount of interest you stand to earn on your balance.
- It is quite easy to do and thus more accessible.
- No upfront cost to be incurred.
- You can rest assured that your savings will be safe in your bank account, so little or no risk is involved. For this, do try to stick to reputed banks.
Disadvantages of saving
- You earn considerably lower returns than you possibly could by investing instead.
- Given the low returns, inflation will reduce your purchasing power over time.
Advantages of investing
- You have a better chance at keeping up with inflation and stabilizing your purchasing power, especially if you own a broad collection of stocks.
- Like bank products, investing products are also quite liquid. You can easily convert a stock or bond into cash.
- Investing generally offers higher returns than saving, provided you choose your stocks wisely.
- Investing could potentially reap profits that raise your net worth and let you accumulate your wealth over a shorter time.
Disadvantages of investing
- Unlike with saving, investing doesn't always guarantee returns.
- Depending on factors such as the economy, you may get back less than what you originally invested.
- Given its risky nature, you'll need to be dependent on an expert if you're not sure what you're doing.
- While it's tempting to go after the best short-term investments, you should ideally let the money stay in your investment account for a period of five years or more in order to better ride out any short term fluctuations.
Conclusion - which is better, saving or investing?
As we mentioned at the beginning of this feature, whether saving or investing is better depends on your personal circumstances.
As a rule of thumb, stick to saving if you need to use the money soon (within a year or less), whereas if you don't need to touch it for a longer period (five years at least), then invest it.
Certainly, your emergency fund should always be kept in your savings and never invested.
Savings should be targeted to meet your day-to-day goals such as buying a new gadget or a weekend's getaway while investing wisely enables you to realize long-term goals such as buying your own home or a car.
So, ideally, depending on the funds at your disposal as well as your life's priorities, you could dabble in both - seek out the best savings scheme and best investment option that checks the most boxes for you.
Whether you are a student or a professional, unforeseen expenses can sometimes make your savings take a hit. In such cases, why not avail of an instant personal loan instead of digging into your savings? After all, it's easier to pay off a personal loan at a reasonable rate of interest over a period of time than bleeding your accumulated wealth.
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