Not all earning members of the society are aware of the merits and demerits of a savings or an investment plan or of the difference between the two.
Not all earning members of the society are aware of the merits and demerits of a savings or an investment plan or of the difference between the two. This is the knowledge which is not considered basic education sadly and ultimately you have to rely on internet sources or an accountant to take the best decision for you as far as your income is concerned. This is the reason why new professionals are confused about what to do with their leftover money after they have paid their bills. Sweat no more as we are here to help you make an informed choice.
What is the difference?
Savings are no less than what we stored in our piggy banks when we were young. It is the money you set aside for a rainy day or a medical emergency in the future. Investment is a different concept altogether because, while in savings, the money you put aside remains the same. In investments, you have an opportunity to put your money into other ventures and grow your wealth by the power of compounding. The money is generated by investing it in Mutual funds, ELSS, stocks, bonds, commodities, indexes, and others.
Using the two:
Savings means that you can use the money you kept aside for emergency purposes whereas, an investment requires you to be loyally invested in a venture to increase the original fund that you put in. This might require you to keep your money in the venture for a particular period of time which can be anywhere from a few months to several years. Which also helps you for Tax Savings
Savings are much more conveniently used up as it is easier to extract them from the bank and pay off any additional expenses. Investments, however, require some planning if you are considering spending it. When you decide to claim your money, it will not reach your bank account in an instant and is bound to take time and therefore, if you plan to spend your invested money, you have to plan ahead and not wait until the last moment to withdraw it.
Savings are not subject to risks because they yield a very low rate of interest. Investments, however, are subject to rise and fall in the value of the company you have invested in. The most unfortunate truth about investments is that while you might be dreaming about all that extra money, you are just as likely to lose your money if the values of your "stocks" fall.
Which one should you pick?
Based on the risks, most people would get scared and pick savings instead of investments to avoid the risks, if at all possible. However, despite its risks, sometimes investment is the smarter choice. If you are not planning on touching your money for more than 5 years, you should consider investing it provided you be prepared more to withdraw your investment when the time coincides with your long-term plan.
You have to set a time frame which would justify investing the money instead of saving it because if you leave your money untouched for a certain period of time, it can result in yielding the big money that you dreamt of, saving you the tragedy of losing your hard-earned money. Moreover, if you are planning to save your money, consider an account in a bank which gives you a higher interest rate so that you can reap more than what you sow.
It is imperative to understand the positives and negatives of both these options so as to plan for your future. However, one also needs to check his own financial background and then plan the investments.