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Should I Save or Invest?
This is the question which most of us ask at some point in our life. There is no doubt that both saving and investment are very important for us but still, we all get confused.
Both saving and investing money is important for us. But what is more important depends upon various circumstances. There is no exact answer whether you should save first and invest later or start investing money right now. Rather you have to consider this depending upon your circumstances and needs. Both play a very important role in building the financial wealth of an investor.
Many people don’t want to take any risk. So, they save their money in saving account or invest in risk-free instruments where they get a very low return on their investment.
On the other side, many people invest almost all their money in the greed of earning a higher return.
What is Saving?
The portion of your income which is not consumed but keep aside for future emergencies is called saving. The primary objective of saving is not to earn income but to preserve the capital. So, money is kept in financial instruments with minimum risk (like saving account in a bank, Recurring Deposit, Fixed Deposit, Liquid Mutual Fund etc.) You earn interest income on your money but the main objective is to save the principal capital.
Related Post: Mutual Fund- A complete guide for beginners.
What is Investment?
Investment is the process of letting your money work for you so that you can generate a return over a period of time. The ultimate purpose of investment is to create wealth which can be in the form of capital appreciation, interest-earning, dividend income, rental income etc.
The main objective of the investment is to generate wealth over a period of time. So, it involves greater risk. Higher the risk, higher the return. Investment involves buying the assets which have the potential for generating higher return like stocks, bonds, mutual fund and make you wealthier over the period of time. Since investing in these financial instruments involves greater risk, it is advisable to have a well-diversified portfolio.
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Difference between Saving and Investment
There is a lot of difference between saving and investment. You can’t create wealth just by saving money only. This is because the return from saving is much lower than investment. Investment is associated with a lot of risks that is why the return from these investments is very high in the long run.
- Saving is typically for small-term objective to meet short term goals say 1-3 years. However, investment is for the long-term objective.
- Saving is to keep money aside for future use. Investment is to utilise your money to buy high-return generating assets.
- The primary objective of saving is to preserve initial capital, however, the primary objective of investment to create wealth.
- There is easy access to your money by keeping your money in the savings account. On the other hand, you have to sell your investment to get your money back.
- With an investment, there is always a risk of losing money. Unlike savings, where there is no or comparatively fewer chances of losing hard-earned money.
Balance between Saving & Investment
You have to maintain the balance between saving and investment. If you don’t take any risk and keep your money in saving account then you will lose the opportunity to earn a higher return from your surplus funds.
On the other hand, if you invest all your money and don’t keep emergency funds then you may lose your money. The return from investment is not consistent and is highly volatile in the short term. If you don’t have a surplus fund then you have to sell your investment to meet your emergencies. Selling an investment at the wrong time may result in loss of your money.
How much Should I Save or Invest?
To save money is more important than to invest it. Before making any investment, you must have enough saving to meet your day-to-day expenses up to the next six months. In additions to that, you must have some saving for any emergencies which may happen any time.
Many experts recommend that you must repay all your debts before making any investment. This is because the rate of interest on the debt is much higher than the return from the investment.
The rate of return from saving is much lower as compared to the return from any investment. So, saving can accumulate funds but it can’t create wealth. You have to invest your money in risk-generating productive assets to create wealth over the period. If you are young then you can take more risk, because you have a lot of time to recover from any losses. However, you have to ensure that you have enough savings which can meet any emergencies shortly. Redemption of investment in the short term is may result in loss of your money.
The rate of return from saving is much lower as compared to return from any investment. So, saving can accumulate funds but it can’t create wealth. You have to invest your money in risk- generating productive assets to create wealth over the period of time. If you are young then you can take more risk, because you have a lot of time to recover from any losses.
Related Post: 6 reasons to start investing early.
But make sure that you must have enough savings to meet any emergencies.
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