Most individuals save. But do they all invest? If you are wondering what the difference is, then read on. Here, we show savings can be done by applying a mechanical method but investment needs more application and thought.
Savings vs. investment
Savings is that portion of post-tax monthly income you do not spend. Investment is what you do with your savings to accumulate wealth with a view to improving future standard of living. So, investment is not the money in savings account. Rather, investment relates to the savings you channel into bank deposits, equity funds and such products either lump sum or every month.
Before technology was applied to investments, we had to work hard to develop the habit of saving continually. Today, that is made easy by simply setting up a systematic investment plan (SIP). An optimal way to save is to set up an SIP from salary account to another savings account (call it your master investment account). Importantly, this SIP must be set up to take money out of your primary saving (salary) account the day your salary is credited.
Investment process is quite another matter. You must determine the products you want to invest in to achieve specific goals. This means taking the optimal amount of risk to achieve each goal. Remember, not taking any risk is risky! That is because you cannot earn adequate return on savings without taking any risk. Note your bank deposits are stable-income products, not safe investments. That means deposits will earn a steady rate of return but carry inflation and credit risks. For instance, if inflation is higher than expected, the maturity value of deposits may not be enough to help achieve your goal, say, making down payment for the house.
Conclusion
You must earn decent returns and build wealth to make savings work for you. Remember, spending comes naturally to us, and savings is a discipline. Why? Happiness in the present is more fulfilling than likely happiness in the future. That means spending today is more fulfilling than saving and investing to spend in the future. That is why SIPs become important, as it helps us moderate the present bias. SIPs enables you to translate savings into investments. Importantly, such investments must build wealth for a purpose — to achieve your desired life goals.
(The author offers training programmes for individuals to manage their personal investments)