The two wonders of personal finance “Saving” and “investment” are often perceived as same by most of us. But, both these terms are distinct and have a very important role to play in our financial life. An investor must understand the difference and relevance of both the elements. And we have to participate in both activities to secure a sound financial future for ourselves.
To begin with, let’s understand the meaning of the terms “saving” and “investment”. Saving is nothing but the excess of income over expenses. So, if your monthly income is Rs 50,000 and your expenses are Rs 30,000. So your saving is Rs. 20,000.
This Rs. 20,000 helps you in meeting your upcoming family emergencies, buying clothes for a cousin’s wedding, or buying gifts for your family this new year, or meet other unexpected expenses, etc.
This saving can be in the form of cash at home or money lying in your savings bank account. When this saving is put to use with a view to generate a return, this process is called investment. So, when you use your saving and buy a mutual fund, or an FD, or put it in real estate, you do it because you want to generate an income on your money. So, these are investment activities.
Although your money lying in your saving account is also giving you a return of about 4%, but it isn’t your investment, because the return is not even able to cover the cost of inflation. If Rs. 2000 can get you a third AC train ticket from Mumbai to Delhi today. Five years later, you would need around Rs 2800 for the same ticket. Now if you deposit Rs 2000 in your saving bank account today, it would give you around Rs 2500 after 5 years, which will not be enough to provide for the ticket. Therefore, money kept in a saving bank account is not enough to cover the cost of inflation and hence is not an investment.
This means money looses its value over time because of inflation, and in order to combat with the evil of inflation, we must Invest. A major differentiating factor between saving and investment is the purpose behind engaging in each. And that is where we shall give a deep thought and decide if the goal for which we are saving, will be met by simply saving or if we need to put in more efforts and “invest that saving” and actualize our goals.
Saving is generally not backed by a goal. The money is being saved because that money is not in use today, or is saved for meeting any uncounted expenses. Or even if there is a purpose it isn’t a defining factor of your life, it can be saving for buying a mobile, or a dress, etc. On the contrary, there is a specific purpose behind investing which has a significant impact on your life. We invest for buying our dream house, we invest for our children’s education, we invest for our children’s marriage, we invest for our retirement or may be we invest simply to create wealth. These goals can not be achieved by just saving. Imagine saving Rs 10 Lacs in a bank account @ 4% interest for meeting your daughter’s wedding expenses which is planned 10 years hence. There will be a huge mismatch between the funds you have in your saving account then and the funds you require. And this gap can only be filled with investment.
Therefore, it is important that in order to achieve our life goals, we invest. And each goal must be aligned with an investment. For each goal, a particular type of investment is required which is determined by the investment horizon, amount required, your financial position, risk taking ability and various other factors. Your financial advisor will help in selecting the investment products ideal for your goals.
The bottomline is it is important to save and to invest the saving. Both of them are independent as well as interdependent. You must be able to draw a boundary between saving and investment, and not just save for your future. Saving & Investment is an ongoing process and should not be disrupted. So, if you are saving and not investing or worse not saving at all, then you must get your act together as your financial health is dependent on these exercises.