Savings vs Investments

When income from various resources, like salary, interest income or rent from a house property, exceeds a person’s expenses, the balance money is the saving. In simple terms, your income inflow is greater than your outflow. Savings are an imperative as they insure your financial stability in the future. It is also the first step in the overall financial planning process. Unless there is some sort of saving of the income it is not possible to invest and generate returns for you.

Just keeping some money aside as savings does not result in a benefit. For example, imagine you find a jacket you wore on your holiday to a snow-clad mountain five years ago. While searching pockets, you find an Rs 500 note. You are pleased to discover the money. You use that to Put petrol in your two-wheeler. If you bought petrol worth Rs 500 in 2008, you could have easily got over 9 liters of fuel for your vehicle. Today, you will not get even 7 liters. This is because inflation ate into your savings.

If your income is Rs 40,000 per month and your expenses are Rs 30,000 then the remaining amount of Rs 10,000 becomes your savings, which can then be invested to gain profits. Savings only mean that some amounts are saved, without any scope for returns. Hence, the need for investments. It consists of putting the money into different areas and assets so that it generates a rate of return that is better than what it would earn if it was lying idle. In the example above, this would mean something as simple as putting the money in a fixed deposit with the Rs 10,000 saved or it could be investing the amount in equities, mutual funds, gold or other available investment avenues, with proper financial planning. Investments protect savings: Inflation erodes the value of the money and reduces the real value of the amount in the future. The challenge is to grow your savings by earning returns over a period of time and beating the inflation. However, along with a specific rate of return, investments also come with a certain kind of risk, which should be matched with the goals set. Both savings and investment are not a one time process. They need to be undertaken continuously