SAVING and INVESTING: How Both are Different and Important

You just started your professional career, fresh from B-school and pretty excited about this new life with freedom to spend your money. The moment you received your first salary and shared the moment with your parents, you got a piece of sound advice from your father, don’t waste and save your money. But, some of your wise friends have advised of investing. So, now you are totally confused between saving and investing, which way to move forward.

Actually, both saving and investing are necessary to spend and enjoy a happy life. Saving and Investing are very different from each other and this post will discuss how it helps to shape up your finances.

Saving

Saving is Income minus Expenses or a part of income set-aside in deposit or savings accounts to meet the future obligation. The popular modes of savings are short-term deposits (Fixed deposits), saving bank account, NSC, post-office schemes, KVP etc.

Saving offers depositor interest on their money that ranges between 3% to 9% and is a highly liquid and risk-free option.

Some Facts About Saving

In long terms, the net return from depositing money in fixed deposit and other saving schemes are far less. Factors that chip away the returns are:

Inflation

Inflation is one of the main factors which eats away returns from your deposit. For instance, when the interest rate offered on your deposit of 1 year is 8 per cent and the inflation rate is going around 5 per cent, the net return on your deposit is mere 3%.

Tax

The interest income is taxable under the Income Tax Act. The total interest earned is added to the taxable income under other sources of the individual and is taxed based on your income tax slab.

Investing

Investing is a subset of saving, in which you put a part of your savings into stocks, bonds, mutual funds and other market traded instruments with an expectation to generate higher returns.

The capital here is subjected to risk of volatility, liquidity, credit risk, inflation risk etc. In investment, the returns are not guaranteed but a smart investor can generate a super-normal return from their investment.

How Much Investment Differs from Saving

Return

Return percentage is not fixed in investing and at times there can be loss of capital as against saving in which interest rate is fixed.

Risk

The risks involved in investing are higher compared to saving, which is totally a risk-free option. The returns are affected by numerous factors as it is discussed above.  Like a small change in interest rate can lead to a large variation in returns of an investment.

Taxation

Tax on profits from investments are treated according to the investment type and tenure of the investment and is not added to your total taxable income.

Verdict

In terms of suitability, saving schemes are ideal for those with short term capital needs (less than 1 year) and for people who are not comfortable with risk. On the other hand, Investing is an ideal option for growing wealth over a long term period and one who is comfortable taking a risk.

Thus, having the right combination of saving and investing mechanism will help you to achieve financial soundness in your life.

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