Saving and Investing – Why You Need Both
When it comes to managing money, saving and investing are often used interchangeably. However, they are two very different strategies with unique purposes. While both are crucial for a healthy financial life, understanding their differences can help you use them effectively to achieve your financial goals.
In this post, we’ll explore what saving and investing mean, how they differ, and why a balanced approach to both is the key to financial success.
What is Saving?
Saving is the process of setting aside a portion of your income for future use. The focus is on safety and liquidity, which means easy access to your money at any point of time.
Common Saving Options:
- Savings accounts.
- Fixed deposits.
- Recurring deposits.
Purpose of Saving:
- Emergency fund (e.g., medical expenses).
- Short-term goals (e.g., vacations, buying gadgets).
Example: Keeping ₹50,000 in a savings account for a medical emergency.
What is Investing?
Investing is the process of putting your money into assets with the expectation of earning a return. Unlike savings, investments involve risk but have the potential for higher rewards.
Common Investment Options:
- Stocks, mutual funds, real estate, etc.
Purpose of Investing:
- Long-term goals (e.g., retirement, buying a house).
- Wealth creation over time.
Example: Investing ₹50,000 in mutual funds to grow it to ₹1,00,000 in 5–7 years.
Key Differences Between Saving and Investing
| Aspect | Saving | Investing |
|---|---|---|
| Purpose | Short-term security | Long-term growth |
| Risk | Minimal | Moderate to high |
| Returns | Low | Potentially high |
| Liquidity | High (easily accessible) | Varies (depends on the asset) |
| Goal | Preserve money | Grow money |
Why Do You Need Both?
Balancing saving and investing is essential for financial stability and growth. Here’s why:
- For Emergencies:
Savings ensure you have a financial cushion for unforeseen circumstances like medical bills or job loss. - For Wealth Creation:
Investing allows your money to grow over time, helping you achieve long-term financial goals like retirement or buying a house. - To Beat Inflation:
While savings protect your capital, they may not outpace inflation. Investments, though riskier, offer returns that can preserve the real value of your money. - For Goal-Based Planning:
- Save for short-term goals like a vacation or an emergency fund.
- Invest for long-term goals like a child’s education or retirement.
How Much Should You Save vs. Invest?
A good rule of thumb is the 50-30-20 Rule:
- 50% of income: Necessities (e.g., rent, food).
- 30% of income: Wants (e.g., entertainment, travel).
- 20% of income: Financial goals (split between saving and investing).
Alternatively, consider the Emergency Fund First approach:
- Build an emergency fund of 3–6 months’ worth of expenses first.
- You can add in more for your short term goals, vacations, personal want or other purposes (try to keep it to a minimum so you have a larger chunk to invest).
- Then, allocate more towards investments.
You can read the full article on 50-30-20 Rule on: https://thewealthist.com/the-50-30-20-rule-a-simple-framework-for-budgeting/
How to Transition from Saving to Investing
- Set a Foundation: Start by saving for emergencies and short-term needs.
- Learn the Basics of Investing: Understand asset classes and your risk tolerance.
- Start Small: Begin with low-risk investments like fixed deposits or mutual funds.
- Automate Both: Use SIPs for investing and recurring deposits for saving.
Conclusion
Saving and investing are not mutually exclusive—they complement each other. While savings provide you with security and peace of mind, investments help you achieve growth and long-term financial independence.
By understanding their differences and balancing both, you can create a robust financial plan that supports your present needs while building a secure future.
Stay tuned for our next blog, where we’ll dive into The Power of Compounding and how it can turn small investments into significant wealth over time.
