What is the Difference Between Saving and Investing?
What is Saving?
In simple terms, saving means putting aside money, bit by bit. The primary goal of saving is to preserve capital. People usually save up their hard-earned money to pay for something specific, like a vacation or a wedding, deposit on a car or house, or to cover for any unexpected emergencies. Typically, it includes the act of putting the money into cash products, such as a savings bank account.
What is Investing?
Investing involves committing your money into an investment product with hopes of making a profit. Investing is different from saving as it involves some level of risk. Investors assume this risk with the hope that they will make more money and increase the value of their investments.
The potential of receiving more money is the motivation behind why you should invest in the first place. However, just putting your money in any financial instrument may not be a smart way to invest.
A smart investment for you would be one that works towards fulfillment of your financial goals and should:
- Consider the amount that you will need to fulfill your goal
- Allocate your money to help you beat inflation
- Understand the time frame you have in hand
Simply following on someone’s recommendations may not be a smart investment.
What is Inflation & How does it affect wealth?
In simple language, inflation is the rate at which the overall market prices increase over time. For example, if the inflation rate was 5% last year, any commodity which was priced at Rs. 100 could cost about Rs. 105 now (Source: TheSWO Financial Calculator)
While looking at your wealth, the effect is simply reverse of the commodity price. Just imagine that if you had Rs. 100 on year ago, you could’ve bought that commodity. But if you kept this money in your pocket for a year, you would find that you are short by Rs. 5.
This is why, you need to invest smartly to overcome this wealth eating monster, and it’s not difficult.
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