Saving vs. Investing
Is there really a difference between Saving and Investing?
Most of us think that Saving and Investing are the same thing. While the terms are often used interchangeably by many, they are as different as chalk and cheese.
The difference between your monthly income and your expenses is what constitutes your "savings".
But when you multiply the money you save by putting it in various asset classes such as stocks, bonds, real estate or gold, you are creating wealth by "investing".
Tarun puts money aside on a regular basis. He spends less than he earns and deposits the rest in the bank. This is Saving.
Arun goes a step further. He puts aside a fixed amount every month in mutual funds. This is Investing.
Let us understand the difference between the two:
Hard cash or the amount that lies in your bank account and earns nominal returns
Savings help you meet short-term goals such as going on a vacation or buying a gadget
Savings can be stashed away in the form of cash or in a bank account so little or no risk is involved
Money in a bank savings account earns low return
Savings invested in various asset categories earn you a substantial profit
Investing money helps you meet long-term goals like buying a house
When you invest there are some risks involved like fluctuating interest rates or other economic conditions that can lead to losses
Investing money has the potential for profits that increase your net worth and help you build wealth over time
Money kept in a safety vault though safe does not generate adequate returns to beat inflation.
Money invested in products like stocks, mutual funds, etc. is subject to risk but has the potential to grow over time.
Impact of Inflation on Savings
The aim of any investment is to beat inflation because with inflation the value of money erodes over time. If the current cost of buying a loaf of bread is ₹30, in 10 years time the same loaf will cost you ₹64 if the rate of inflation is 8%.
Hence, when you invest your aim should be to earn a return that is greater than the rate of inflation. Say, you put your money in a bank account that pays you interest at 7%. A year later, you will have 7% more money. However, if inflation is more than 7%, it will purchase less than the amount that you began with although you have more money in your pocket.
If your goal is to multiply your savings, you need to invest it so that the interest or profit you earn is higher than the rate of inflation. Thus, to become wealthy, all you need to do is invest to beat inflation and do it regularly over time in line with your financial plans!
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