Earning money for livelihood is something which is done around the globe. Once we get our paychecks, we are left with mainly three things to do with your money Spending, Saving, and Investing.
If you want to have a healthy financial and social life, you must have a crystal clear idea on all three concepts. Not only the understanding, but you must also know which action to be done when and the right proportion too. Before we understand all those complicated concepts, let us first understand what the three actions with money actually means.
A Reintroduction to Spending, Saving, and Investing
Spending is something which is comparatively easy to understand. This action of money does not require any kind of strategy. Even we can say that spending money is so very easy that people don’t even realize when they have spent the whole months earning within a week. The lion’s share of our monthly income is spent on different things.
Saving money is just the opposite of spending or consuming it. Saving refers to an economic condition when people limit their spending and money which is left after the spending is kept safe. Savings are done by keeping their ideal money in bank accounts or sometimes in the chest of their homes, lockers etc.
Money can also be invested. Investing is a concept which is very different from the concept of spending and saving. Investing money is something when a person spends his money on something which promises to give you a better return in future. People invest their money to build a passive way of income. Investment is such a concept where your money will earn more money for you. In other words, you can say that investment puts your money to work
The concept of spending is very simple but the confusion arises between saving and investing. Many a time these two words are used interchangeably. But if you dive deep into it, you will find that there is a world of differences between the two concepts.
How to Make the Right Choice Between Saving and Investing
In most of the cases, savings is done to achieve smaller goals. One does savings for new home appliances, a bike or a foreign tour which generally completes with a year or two. Savings is done by keeping your money in a bank account with a minimal interest rate but the risk appetite is near to nil in bank savings accounts. On the other hand, investment is done with larger life goals. Some of the investment goals can be of retirement corpus, buying a home, children’s education etc. There are a number of investment vehicles found in the market such as mutual funds, shares, stocks, real estate, gold etc. Investments give you good returns only when continued for a quite long time.
Saving contains very less risk of loss of funds. The risk of loss is minimal to nil in savings. Usually, people prefer to have savings instead of investing as they are afraid of the potential loss of funds. On the other hand, invest carries some risk of loss with it. Some investment vehicles carry less risk while some others come with the bigger risk of loss of funds. The financial market often raises and falls, driving the value of your investments. But if you stay longer in the market, you will earn a profit over time.
The liquidity of money is another big difference between a savings and investment. The liquidity is always high in savings. If you have kept your money in your savings account, you can access it any time. Any urgent financial need can be fulfilled if your savings account has adequate fund. Contradictory to the fact, when you invest your money, the liquidity of your fund is almost nil. Your savings can not help you to meet urgent financial needs. Different kind of investments takes the different duration of time to get liquefied.
The last difference but never the least difference between investment and savings are the returns. As it is mentioned above, the risk appetite in savings is very minimal so as the interest rate. The interest rate which can be earned by savings is just for a namesake. But if you look at the returns gained by investments, you will find a huge difference. The earning from an investment is much higher than the earnings gained by savings.
Though sometimes the words ‘saving’ and ‘investing’ are used interchangeably, they are quite different – and each has its own role to play in your overall wealth strategy. A healthy financial life needs a perfect balance between investment savings and spending. All three has its own role to play in the life of an individual. Spending money wisely, saving for short-term goals and investing for long-term goals and is the mantra for a happy easy financial life.