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IS SAVINGS BETTER THAN INVESTING

5th March 2018

While saving gives you the flexibility of using your money on your own terms and requirements, investing gives you multiple opportunities with varying risk levels to make your money grow. Before you decide whether saving or investing is right for you, it is important to define the terms in simple language. “Saving” means the act of not spending your income, and “savings” denotes that part of your unspent income which you keep aside in the form of cash or bank deposits. “Investing” means the act of deploying a part of your income into different financial assets, or ‘investments’, like equity, gold, real estate etc, with the expectation of generating additional income or profit or both. Before you decide on how much to save and how much to invest, it’s a good idea to take stock of your current financial situation. If you have any debts, you might be paying more interest on your debts that you could earn by saving or investing your money. It is advisable to paying off your debts first before you think of saving or investing. You should also consider all the other aspects of your finances, such as living costs, insurance premium payments, utilities bills and small cash buffer for minor unforeseen expenses, which you might call a “rainy day fund”. A small expense will be a “drizzle” manageable with your cash savings, but a bigger requirement, or a “downpour”, calls for immediate cash deployment. Which is why you must have some money in a savings bank account for easy withdrawal without liquidating or breaking any investments, which almost always results in a loss of return. Cash savings in hand keep on reducing the value of your money due to the effect of inflation. Also, most bank accounts pay a fairly low rate of interest, which sometimes does not keep up with inflation and leads to a higher probability of gradually reducing the purchasing power of
your money. Investing, on the other hand, is directly proportional to your views and take on risk, as every investment made for generating returns comes with some amount of risk. If you can accept some risk to your capital, then investing should be the next step after you have deployed your capital into some level of savings. Investing can provide a hedge against inflation, which savings cannot. Investments offer a higher potential for comparatively more returns than bank accounts because the value of your investment can go down as well as up, whereas the return on your savings in the bank account is fixed. When you invest, there is a far greater potential for gains, as compared to what you are likely to get in a savings account. Historically, investments have always outpaced inflation as compared to savings. You also need to ascertain when you will need a certain amount of money. If you have a specific goal in mind to be achieved within a calculated timeline, then investing is the way for planning to achieve the goal, provided you are relaxed with the fact that your capital will be parked aside till the timeline is reached. You also need to know that the value of your investment is bound to have its ups and downs in the investment horizon, and you may get back less than you had invested. So, if immediate access to your money is important, or you want to keep the risks down, a savings account may be more appropriate. To ensure that your unspent income gives you marginally higher returns by beating inflation, you must strike the right balance between saving and investing. A smart combination of saving and investing can help you achieve the dual objectives of being cash-ready in the event of an immediate requirement,
and reaching your financial goal by the set timeline, and sometimes even before that. Therefore, it is always advisable to invest your surplus income in diversified assets for spreading the investment risk, and continuously monitor keep optimizing your investment portfolio.

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