This article discusses the two basic financial
terms – Savings and Investing. In general, the two terms sound same to most of
the people. Often the salaried class people who are conscious of their future
financial needs keep aside a fixed amount each month from their salary and get
satisfied that they have secured their future. But is it so?
Is it enough to have a secured
financial future?
Let’s see
what investing genius Warren Buffet says:
“If you don’t
find a way to make money while you sleep, you will work until you die”.
Through savings, you are keeping aside your hard earned
income to meet your future needs but by investing you make your money work for
you. It’s okay to keep a decent amount of your money liquid, that is, either in
savings bank account or in cash but it’s never okay to pile up this liquid cash.
Savings is the first step of attaining financial freedom but
investing is the most crucial one. Once you have identified the ways to save
some money from your monthly income, the next step is to identify the ways to
invest it to generate more income from it.
An investment is anything you acquire for future income or
benefit. Investments increase by generating income (interest or dividends) or
by growing (appreciating) in value. Income earned from your investments and any
appreciation in the value of your investments increase your wealth.
Now, the next question that may arise in your mind would be –
“if investment is all that good, why not invest the entire money and create a
lot of wealth”?
Here’s the answer – “because it bears RISK”
Nothing in the financial world is offered for free and is
easy to attain, if it would have been so anyone and everyone would have turned
millionaire. The major differentiator between savings and investments is risk. While
saving you know that you will be getting a defined return after a certain
period of time but in investments you may or you may not get the desired
return. In fact, it may lead to a loss.
Always remember” it takes high risk to generate higher return”
By this time, you might have got confused about which path to
take, savings or investments?
Actually, both savings and investments are important and you
should have equal focus on both. But the proportion in which you should
allocate your money should depend on the following factors:
1.
Risk
appetite – are you risk averse or risk taker, how much risk can you take.
2.
Time
Horizon – are you keeping it to meet your long term goals or short term goals
3.
Your
financial goal
Here’s a look at savings vs. investments on the above
parameters, will discuss these factors in detail in my next article.
|
|
Saving
|
Investing
|
|
Risk
|
Minimal or no risk
|
You may lose some
or all your money
|
|
Time Horizon
|
Short term: Typically
for smaller, short term goals in the near future
|
Long term:
Typically for bigger, long term goals
|
|
Financial Goal
|
May be for retirement
funding, social security
|
More specific
goals like child’s college fee, marriage etc.
|
