Difference between Savings and Investments

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Is there a difference between Savings and Investments? Let us find out.

Key Takeaways

• Savings and investments are two sides of the same coin.
• Saving is the act of setting aside money in Bank Accounts and Deposits.
• To invest means to allocate assets in various market securities.
• While savings generate lower but safer returns, investments involve risks but can generate significantly higher returns.
• Savings help achieve short term goals, while investments can help you realise your long-term goals.

Financial planning is the key to life-long financial security. It involves several strategies, from budget planning and strategic asset allocation to determining financial goals and gradually building your wealth. But to take the first step towards financial planning, you need to create savings and invest in various instruments and investment products. Let us analyse the difference between savings and investments in this article.

What are Savings?

Savings can be defined as the act of not spending your money to fulfil every single impulsive want you have. Instead, it involves setting funds aside for emergencies and future expenses so that you can access it at a moment’s notice, whenever you need it. The most common way to create savings is to open a Savings Account in a bank and park away your idle money in it. The funds you park in a Savings Account typically do not involve any risks and earn you decent interest income.

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What are Investments?

An investment is the act of buying assets with the intention of growing your capital and achieving capital appreciation. It involves clearly defining your financial goals over the short and long term and taking measures to achieve them. When you invest in something – be it real estate, equity funds, mutual funds, etc., you have to consider your risk tolerance. You should be open to the idea that while your investment may result in capital appreciation, it can also put your capital investment amount at risk.

How are Saving and Investing Similar?

Even if investing and saving have different goals in your financial agenda, they are related in several important ways:

• Creating Wealth: Both approaches are essential for gaining financial success. While investing helps you increase your money over the long run to reach larger financial dreams like retirement or a down payment of a house, saving enables you to set away money for emergencies or short-term goals.
• Goal-Oriented: Setting specific goals is necessary for efficient investing and saving. Knowing what you want—a new automobile or retirement security—will help you decide how much to save or invest and for how long.
• Disciplined Approach: Discipline is necessary for both investing and saving to be successful. Reaching financial milestones requires consistently allocating funds for your objectives and adhering to your strategy.

How is Investing Different from Saving?

Savings and investment are similar in some ways, yet they differ in a few important ways:

• Products: Common savings options with principal protection and guaranteed returns include savings accounts and fixed deposits. Contrarily, investments cover a broader range of choices, including stocks, mutual funds, and real estate. The risk and return possibilities of these goods vary.
• Protection Against Inflation: Savings accounts normally have low interest rates, which might not keep up with inflation. Your money may lose purchasing power over time due to inflation. Real wealth growth can be achieved through investments, which have the potential to yield better returns than inflation.
• Returns: The returns on savings accounts are steady and assured. On the other hand, investments come with a risk of losing money in addition to the possibility of greater returns. The danger of your investment value shifting is fundamental to the possibility of larger profits.
• Risks: Since your principal is usually guaranteed, saving carries little risk. The level of risk associated with investments varies based on the product selected. For instance, stocks may be riskier than bonds.
• Liquidity: Savings accounts have a high level of liquidity, which makes it simple to access your money when necessary. Investment products could require selling at a loss in order to access your money before they mature, or they might have lock-in periods.
• Financial Objectives: Savings is the best option if you require quick access to cash for emergencies or short-term ambitions. Investing is appropriate for long-term objectives where you have the time to weather market turbulence and maybe reap greater gains.

Savings vs Investing – What Should You Do?

Let us now compare the differences between savings and investment.

Products

Banks usually offer savings products. The most common products banks offer include Savings Accounts, Fixed Deposits, Recurring Deposits, and Tax-Saving Deposits. Conversely, investment products include various instruments in the financial market, including shares, stocks, bonds, mutual funds, etc.

Returns

The returns rate is a crucial point of comparison between savings and investments. While the former generates nominal and steady returns in the form of interest payment, the latter can generate a higher rate of returns resulting in actual gains. Investments can help you earn-inflation-adjusted returns, which can be significantly higher.

Risks

Savings products are generally less risky, keeping your capital amount secure. The bank returns the entire capital amount when your deposits mature. However, investments involve several risks such as market volatility, fluctuations, etc. You must, therefore, consider your risk tolerance before investing in any stock market instrument.

Goals

Saving money generally help you fulfil your short term goals. You can also create an emergency fund through savings. Investment products can help you achieve your long term goals like planning for your child’s education, buying a house, etc.

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Final Note

In the debate of savings versus investments, there is no definitive winner. Building wealth often starts with saving. You can then diversify into various investment options such as financial markets, bank fixed deposits, or real estate. It’s crucial to align your choices with your financial goals and risk tolerance while maintaining a balance between saving and investing.

Download the DBS Bank app to open your Savings Account and begin your journey to successful investing. Also, take advantage of our investment services, including mutual funds and digiPortfolio, to stay ahead in the financial game.

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Frequently Asked Question

1. Why do some people prefer to save rather than invest?

   Given the reduced risk, assurance of their money, and stability, many people may favor saving over investing. Saving is best suited for short-term objectives or people who value security over larger possible profits and have a low risk tolerance.

2. How much money should be saved vs. invested?

   Depending on your objectives and risk tolerance, there is an optimal savings to investment ratio that you can balance. Generally speaking, it would be wise to save more for immediate necessities and emergencies. Next, after determining your risk tolerance, invest the money set aside for more long-term objectives.

3. Why do some people fail at investing?

   Emotional decisions, a lack of diversification, a search for quick profits, and insufficient research can all cause investors to make mistakes. These situations can be avoided by controlling risk and following a well-thought-out plan.

*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.