Savings and Investments – How Are They Different?

Savings and Investments are absolutely important for every citizen. They can be used in various ways to meet expenses but it must be understood that there are some major differences between the two.

Economists and bankers always advise that ‘savings’ as a habit has to be learned at a very young age; this essentially teaches the value of money in a small way and helps to understand macroeconomics at a later stage. Saving money and investing money are two completely different concepts altogether; savings is part of the money left over after monthly or annual bills and expenses have been met or keeping aside a certain portion of the income. Savings are generally used to deal with unexpected expenditure like an illness or unforeseen accident, home repairs, educational expenses etc. It can be a pre-fixed percentage of total earnings like 10 percent or 20 percent. In other words, savings is hard cash ‘saved’ from expenditure by being cautious or avoiding an expenditure altogether. Investments on the other hand pertain to that certain sum of money put aside in financial products or systems to generate returns and increase incomes.

The three prime factors where savings and investments differ are:

• Time – savings usually cater to short-term needs unlike investments that need longer durations of time from a few months to a few years to generate returns.

• Liquidity – savings are the most liquid of assets as they are accessible at any time. Investments however cannot be liquidated immediately and may take from a few days or a few weeks to attain liquid status.

• Risk and reward – the risk factor with regard to savings is almost negligible but do not see much return as compared to investments, which may be fraught with risks. But investments that are done wisely – for e.g. in gold, mutual funds, shares and stocks etc. – can help fetch manifold returns over a period of time.