Saving vs Investing : The 2 Habits We Need To Master For A Prosperous Future

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Saving vs Investing

Welcome to realfinplan! In this article we will discuss about Saving vs Investing and why we need to master these two habits for a prosperous future.

Nowadays, Saving and Investing has become more important to secure financial than ever. To achieve we need to have a proper strategy for them. In this article we will try to explore the significance of savings and investments and try to understand why they are crucial for building wealth. Before that I will urge you guys to read my previous article: Covering Basics Managing Risks for a Secure Future

What is Saving?

Savings is nothing but the practice of setting aside money from our income with the primary objective to accumulate funds for future use. When we save, we focus on the safety and liquidity. In general we keep our savings in low-risk accounts, such as savings accounts or deposits. These accounts offer a stable return on the deposited money. Savings are generally used for short-term goals (like purchasing desired items, going on a vacation etc). It also works as a buffer in case of unplanned financial emergencies.

As I have said before, it’s a ‘practice‘. So, you need to save consistently to create a financial cushion, achieve immediate goals so that you will be able to build a strong foundation for both present and future needs and wants.

What is the most Important aspect of Saving?

To achieve any kind of financial milestone or goal, you need to save first. Without savings it’s impossible to create an emergency fund or to buy any items like mobile, car etc. Yes, there is always an option to go for a loan. But that’s the most important thing about saving, so that we won’t have to opt it. If you don’t have the habit to save, then first you should develop it. Then only you can achieve the other financial needs and wants.

  • The most common mistake we make is that when we get salary or income we spend it first then we try to save. We generally follow “Income – Expenses = Saving”. It’s the wrong way to manage finance.
  • The equation should be “Income – Saving = Expenses “. If we spend first, then our habit will be spending not saving. So, we must save first. If we get a salary and we think of saving some amount, then save it first. The expenses will be automatically taken care of. Trust me, I am saying this from my experience. 

The most important aspect of saving is consistency. We must be consistent when it comes to the practice of setting aside a portion of our income regularly.

  • It doesn’t matter what is the amount if you don’t have the consistency. The thing is the discipline or consistency makes a significant difference in the long run. It creates a routine and ensures that you are continuously making progress towards your financial stability. Even small contributions made regularly can make a substantial difference in our financial future.
  • If you look at any financially successful person’s journey you can find differences in investment philosophy and strategy. But they are will be one thing common, that is “discipline and consistency”. So it’s the key to financial success, stability and everything related to Personal Finance.
Saving vs Investing
Saving and Investing

Why do we need to develop the Habit of Saving?

It is so vital to develop the habit of saving which ultimately provides financial will being and overall peace of mind. Here are some compelling reasons to build this habit.

Saving provides a financial safety net during any kind of financial emergency. Life is full of unexpected events and that’s why we need to build an emergency fund by saving, so that we can handle any crunch situation without opting for a loan.

No matter what, you need to give purpose to your savings and investments, you need to identify your goals first. Saving help us to achieve short term financial goals more easily. Whether it’s buying a new gadget, going for a vacation etc, we can full fill our desires without straining our budget. Also learn : Why You Should Not Use Equity For Short Term Financial Goals? Sequence Of Return Risk

Saving helps to prevent the burden of debt. When you have savings, you are less likely to use credit cards or to go for a loan for your everyday or unexpected expenses. That ultimately allows you to manage your finance more effectively.

Knowing that you have saving in place, brings peace of mind. It reduces financial stress and anxiety, allowing you to focus on other aspects of life.

Saving is the stepping stone towards long term financial independence. If you don’t have the habit to save then you won’t be able to invest for your long term goal like retirement planning, child education planning etc. By saving consistently you can build a substantial reserve that can be utilized in the future.

If you are disciplined about saving then you can also be productive in many ways. You can explore many new things,  like you will able to fund your expenses for starting a business.

What is Investing?

Investing involves allocation of funds to achieve long term growth and to generate profitable returns. The primary goal of investing is to beat inflation.

Unlike savings, investments carry a certain level of risk as the value of assets fluctuates with market conditions. As investment is volatile in nature it carries a certain degree of uncertainty. Due to this volatility investments have the potential to generate higher returns. Thus it offers the chance to outpace inflation.  But we must understand that investments carry a certain degree of uncertainty and that’s why they require a longer time Horizon.

Why do we need to Invest?

We all want to build wealth and achieve financial security for the long term. There are a lot of factors on which our long term financial needs depend. We will try to learn the involvement of Investing (which comes with a certain degree of “risk” and “uncertainty”) on those factors.

The most important factor is Inflation. We just can’t avoid it. The uncertain increase in prices of goods and services over time, eats up the purchasing power of money. If your savings are not growing @ inflation, the value of your money will decrease over time. Investing allows you to keep up with inflation or even exceed it. And if you can do that, then congratulations, you will not only preserve your money but also you will be able to build wealth.

When we are young, we have the ability to work. But as we age, it may decrease over time. At some point of time Retirement becomes inevitable. Funny thing is, you can’t even take a loan for Retirement either. If we can invest wisely during our working years, then we can create enough wealth and retire happy.

We can have many goals like buying a house, funding our children’s education or retiring comfortably. To achieve these financial goals we need more money than regular savings can provide. Investing can provide us that much of Corpus. And that “CORPUS” should be your soul target to achieve, not the return.

Investing provides us that platform where we grow our wealth significantly faster than the traditional saving method. Investment products like Stocks, Mutual funds, Real Estate, bonds etc are very handy to take advantage of compounding and capital appreciation. You can make your money work for you.

Investments come with risk, yes. But it also gives us the opportunity to diversify our money in various asset classes. If one asset performs poor in a market condition, then the other one can perform well. Thus we can balance out and reduce the impact of market fluctuations. Thus investment helps us to reduce the risk.

To know more about Asset Allocation, please dive into our other articles:

We can also generate passive income through investment. We can rent a real estate property. We can get dividends if we invest in stocks, starting a new business. Passive income is so important in our financial journey as it can lead us to financial freedom.

Thus investing provides us the pathway of long term financial security. If our basics are covered and we can invest with a “proper strategy”, we can face any kind of financial emergency during challenging times.

Saving vs Investing
Saving and Investing

Saving Vs Investing: What are the Main Differences between Saving and Investing?

Purpose

Saving – The primary purpose is to build Emergency Fund and achieve short term goals

Investing – It aims to beat inflation and grow wealth.

Risk and Return

Saving – Main focus is to have safety and liquidity. So, saving is low risk and return potential is low to at par with inflation.

Investing – It comes with a certain degree of risk and uncertainty but it gives us the opportunity to outpace the inflation

Time Horizon

Saving – It is typically for short term needs and wants. Time Horizon is about 5 years with flexibility.

Investing – It’s a long term strategy. We have to give time to take advantage of compounding.

Liquidity

Saving – Where we put money for saving, they are easily accessible. Thus gives us liquidity.

Investing – As investments are for the long term, they can be liquid and partially liquid. The product can have a lock in period or can have restrictions in withdrawal.

Conclusion

Savings and investments are powerful tools to secure a financial future. Savings can be used as a safety net and to achieve short term needs and wants. It also helps to create long term stability. Whereas we can use investments to beat inflation, diversify risk and create wealth. Remember, starting early and staying disciplined is the key to financial stability, success or whatever you can call it. It adds fuel to the power of compounding. If your basics are covered and you are critically disciplined, you can lay a foundation for a secure future maximizing your wealth.

Also read about Why do we need Goal Based Investment Planning?

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