First list down all the goals you would want to achieve and the things that you would like to have in the near, not so near and the distant future. For example, you may want to buy a new car, go on a foreign holiday, buy your dream house or even create a wealth reserve to support you after retirement.
The money that you put aside after meeting your expenses is your savings. Savings help in emergencies when you need quick access to cash (called liquidity). For example, you or a family member may need immediate hospitalization due to a sudden illness or accident. Your savings also help you meet your short term goals; for instance, you may want to take a holiday in the near future, which can be funded from your savings. Most of us leave our savings in our bank account. While our money remains safe, it also earns a modest amount of interest.
Investing implies using your savings to earn profits. This means putting your money into other assets, not just in your bank account, with the expectation that this invested money will end up making a handsome profit for you. Investing will help you fulfill your medium and long term goals (buying a house, marriage, retirement, etc). The cost of these goals will be higher in the future due to inflation. Inflation means the increase in prices over time, which results in making you spend more each year on the same amount of goods and services. The returns from investing for the long term will help you cope with the rising cost of living.
Savings, on the other hand, will most probably not be enough to help you overcome inflation since it will give you a very modest amount of return which is usually lower than the inflation rate. Your investments could include stocks or shares and mutual funds, both of which have inflation beating qualities.
You are advised to consult your investment advisor or to do your research before making investment decisions.
Saving versus investing
| Saving | Investing | ||
|---|---|---|---|
| Pros | Cons | Pros | Cons |
| Good for emergencies and short-term goals | Does not help with wealth creation | Helps you to achieve your long-term financial goals | Involves taking investment risk |
| Allows you access to your money at short notice | Does not help deal with inflation | May beat inflation over the long term | Some investments may have poor liquidity |
| Possibility of earning interest | Interest is taxable beyond Rs 10,000 per financial year | Possibility of wealth creation | Needs to be regularly monitored |
Financial Goals
-
Short-term goals: Emergencies or additional expenses such as buying a car, taking a holiday, etc.
-
Medium-term goals: Saving for your children’s education, wedding or new house.
-
Long-term goals: Saving for your retirement.
Key Takeaways
Savings help you to take care of expenses, and to remain prepared for unexpected emergencies.
Savings may not keep pace with the rising cost of living. Inflation can eat into your savings.
Investing helps you build wealth and fulfill your long term financial goals.
Investing wisely helps you stay ahead of rising costs or inflation.
