Most of the times people think that savings and investment are same and use these two words as synonyms of each other. But actually savings and investment are two different concepts and we need to realize this. Even many of the financé websites also confuse savings with investments. Many times we also give messages to our children like” penny saved is penny earned”, “ Savings of today is assurance of tomorrow” etc. so while communicating we use the word savings. But savings has a limited meaning whereas investment is much broader concept in itself. This article is an effort to clarify the difference between the two so that all of you can exactly understand this and then check whether you are good saver or good investor?
What is savings? & how it is different from Investment?
Savings is basically the difference between your income and all type of cash outflows like your monthly expenses, EMIs, taxes etc. . See below formula.
Income – (Expenses + EMIs+ Taxes) = Savings.
So from above formula it is clear that money that is saved after paying of all expenses, liabilities and taxes is saving. Now you may park it in saving account, fixed deposits or liquid funds on a temporary basis. But this money doesn’t start earning good returns until you apply it towards effective investment instruments as per your financial goals.
So there the difference of savings and investment starts. Actually there is very thin line between savings and investment. Savings is the money which is actually left out after paying all your expenses, taxes and liabilities and you have kept aside. But it becomes investment when you allocate it for your financial goals and invest in instruments like shares, bonds etc. with clear investment horizon and strategy to generate better returns. Money which is saved should be invested to meet your Short Term, Medium Term or Long Term Goals. Following are few important differences between Savings and Investment.
How much should you save? & How to improve your savings rate?
Your savings have direct impact on your wealth creation. But the question is how much should you save from your income? Some people say that you should save 30% some say 50%. But actually there is no such standard for how much should be saved from income. At initial stage of your career when your income is low you may not be able to save more. But as your income grows and your basic expenses are met with, your savings rate should improve.
To improve savings rate one should focus upon budgeting.Once you focus upon budgeting and then writing actual expenses, you can compare them with budgeted expenses under different heads and mark out the deviation. If actual expenses under any head are more than budgeted, you can analyze why they are higher than budgeted. This will help you in controlling your expenses and improve your savings rate.
To conclude with investment and savings are different and a part of your savings should be invested for long term goals and wealth creation. Generally Indians are good savers but poor investors. So it is important to become a good investor than a good saver because investments will create wealth for you and not savings.