Friday, 26 January 2018

Saving Vs. Investments

This article discusses the two basic financial terms – Savings and Investing. In general, the two terms sound same to most of the people. Often the salaried class people who are conscious of their future financial needs keep aside a fixed amount each month from their salary and get satisfied that they have secured their future. But is it so?

Is it enough to have a secured financial future?

Let’s see what investing genius Warren Buffet says:

“If you don’t find a way to make money while you sleep, you will work until you die”.

Through savings, you are keeping aside your hard earned income to meet your future needs but by investing you make your money work for you. It’s okay to keep a decent amount of your money liquid, that is, either in savings bank account or in cash but it’s never okay to pile up this liquid cash.
Savings is the first step of attaining financial freedom but investing is the most crucial one. Once you have identified the ways to save some money from your monthly income, the next step is to identify the ways to invest it to generate more income from it.
An investment is anything you acquire for future income or benefit. Investments increase by generating income (interest or dividends) or by growing (appreciating) in value. Income earned from your investments and any appreciation in the value of your investments increase your wealth.
Now, the next question that may arise in your mind would be – “if investment is all that good, why not invest the entire money and create a lot of wealth”?
Here’s the answer – “because it bears RISK
Nothing in the financial world is offered for free and is easy to attain, if it would have been so anyone and everyone would have turned millionaire. The major differentiator between savings and investments is risk. While saving you know that you will be getting a defined return after a certain period of time but in investments you may or you may not get the desired return. In fact, it may lead to a loss.
Always remember” it takes high risk to generate higher return”  
By this time, you might have got confused about which path to take, savings or investments?
Actually, both savings and investments are important and you should have equal focus on both. But the proportion in which you should allocate your money should depend on the following factors:

1.      Risk appetite – are you risk averse or risk taker, how much risk can you take.
2.      Time Horizon – are you keeping it to meet your long term goals or short term goals
3.      Your financial goal

Here’s a look at savings vs. investments on the above parameters, will discuss these factors in detail in my next article.

Minimal or no risk
You may lose some or all your money
Time Horizon
Short term: Typically for smaller, short term goals in the near future
Long term: Typically for bigger, long term goals with
Financial Goal
May be for retirement funding, social security
More specific goals like child’s college fee, marriage etc.