Saving vs. Investing money: A guide to understand the key differences

Do you think saving and investing are the same? If yes, then you are wrong. Both are entirely different.

Saving and investing play a vital role in your financial strategy. To build wealth, you must understand the difference between saving and investing money.

To begin this article, let us first understand the meaning of saving, investing and then we will tell you the key differences between investing and saving.

What is saving money?

Saving money means you are parking hard cash on a regular basis in risk free liquid investments or in your saving bank account. 

It means you are creating a cash reserve.

Many people are asking how can I save more? Well, the answer is very simple, you need to spend less than what you earn. 

If you can’t control your expenses, then earn more. Maybe some of the tips on making money online might help you to have additional sources of income.

It means you spend less than what you earn and keep the balance in your saving bank account. You are basically keeping money to get it when you need it.  

Your risk of losing money is also very less as you are keeping the money in a savings account or risk free liquid investments.

What is investing money?

Investing money means you are using your cash reserve to buy an asset which you think will give you a good return over a period of time.

Investing is one step further to put your savings into high return assets in order to build wealth.

Assets can be anything like;

The main objective is to be more wealthier than before.

Remember, the investment journey will start when you start saving money. Your savings will help you to get funds for your investment plan. It’s the starting point of your journey.

Investing is a long term strategy to build wealth.

Key Difference between investing and saving

Here are the key differences between saving and investing money.

Better Return 

Saving gives you less return in comparison to investing. 

For example, if you are keeping your surplus money in a bank savings account, you can earn roughly up to 4% per annum return. However by investing in a mutual fund or in the stock market, you can get a better return in comparison to 4% per year. 

If you are a conservative investor, then you can try buying risk free government securities, fixed deposits from PSU banks and post office schemes. 

Mutual funds can be a better investment option for beginners as funds are well diversified and you need not have the headache of stock market volatility. If one company fails, it does not impact the overall performance of the fund because of diversification.

If you have decided to invest directly in the stock market by buying and selling stocks, make sure that you have acquired the competency and skills before getting in. Beginners are always advised to invest through mutual funds.

Risk

The biggest difference between saving and investing is risk.

In saving you will be exposed to very less risk as money is kept in a bank savings account and/or in risk free investments. Which means chances of losing your fund is very less.

However, in case of investments, based on the asset you have chosen, your risk may go up. Therefore, you should invest by diversifying your portfolio with proper planning. 

Comparative table showing difference between saving and investing

Basis for comparisonSavingInvesting
MeaningRegularly putting money aside for future use or emergency.Using saved money to achieve medium and long term financial goals.
Where money keptIn bank saving account, recurring deposits and risk free liquid government securitiesIn stock, mutual fund, bond, real-estate, gold and other high return assets.
PurposeTo accumulate fund for short term goals and emergencyTo raise funds for medium and long term goals
RiskLess riskyRisk is very high depending on the type of investments
ReturnLowHigh return based on type of investments
Liquidity levelHighly liquidLess liquid

Importance of emergency fund in case of investing

No matter at what age group you are. It’s always advised to have an emergency fund to take care of at least 5-6 months living expenses. This fund will help you to take care of your emergency needs without affecting your investment plan.

If you don’t have an emergency fund in your savings account or in any other liquid assets, you will be forced to sell your investments to raise funds. It might affect your financial goals. If you have invested in the stock market, based on the condition of the market, you may lose your capital.

Therefore, before getting into the stock market or any other risky investments, you should make sure that you have a solid emergency fund saved.

If you are not into investing, the time to get started is now.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.