Before delving deep into this topic, let’s first understand the difference between the two.
As per my experience, I understand that a lot of people get confused between terms, Savings and Investing.
Saving is when you keep your money aside in a non-risky financial product in order to use it for short-term goals such as buying a beautiful wrist watch in 6 months.
Investing is when you keep your money in a risky financial product and aim to grow your money in the long-term.
While saving, you must park your money in a non-risky financial product such as Bank Fixed Deposits, Recurring Deposits, Liquid Funds etc. so that the original value of the money is retained.
Whereas while investing, your money must be parked in those financial products which give extraordinary returns in long-term such as Mutual Funds, Company Stocks etc.
Enough about Savings and Investing, how much should be the ideal duration for both?
Well, if you want to accomplish a short-term goal ranging from 0-3 years, you must keep it aside for savings. If you aim to achieve a long-term goal, whose time duration is greater than 3 years, you must invest in order to get maximum gains from the financial product.
What happens if you “save” for the “long-term”?
When you tend to save your hard-earned money for the long-term, you tend to get lower returns on your original value. Thus, money loses its value over the course of time.
For example, if you park an amount of Rs.1 Lakh in a Bank Fixed Deposit for 5 years, you’ll receive an amount of Rs.1.37 Lakhs after 5 years at an annual rate of 6.50% (set by the banks). An interest of Rs.37K on your investments is not bad.
But the point is – can you earn more? Definitely yes, if you choose Investing over Saving.
If you invest your Rs.1 Lakh in Mutual Funds or Company Stocks which tend to give you higher returns (8-15%) in long term. Say, an initial amount of Rs.1 Lakh, if invested in a good mutual fund, can become an amount of Rs. 1.76 Lakhs after 5 years at 12% per annum compounded annually.
Now that you have seen it yourself that if you choose to “Save” for the “Long-term”, your money loses the opportunity to earn more. So guys, do remember:
- Always “Save” your money for your short-term goals such as Holidays Expenses, Car Down Payment etc. so that your money remains intact.
- Always “Invest” your money for your long-term goals such as Child’s Education, Wedding Expenses etc. so that your money earn more interest in the long-run.
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