Difference between Savings and Investment

Key Difference: Saving requires keeping aside a part of your income regularly in order to deal with unexpected expenses. Investment means putting your saved money in various products in order to earn returns and grow your wealth.

 “Saving allows us to invest in the future, so technically savings is the same as investing.” These words are often believed to true and results in the confusing that these terms are synonymous.  These words actually have very different connotations when it comes to use.

Let’s take Peter for example: Peter makes USD 4000 a month. He uses USD 2000 for necessities, such as food, clothing, etc. The rest USD 2000, he puts aside. Now, what he does with this money will determine if he’s saving it or investing it.

Savings is when an amount of money is placed aside in a very low risk manner, which allows the money to be used for a rainy day. So, if Peter puts the money in a safe at home, he will be saving this money. However, there is very little room for income. There are also other options that can allow Peter to earn a little extra interest on the income so that it doesn’t remain idle. However, the primary amount should not suffer or taken away from.

Savings options include: Savings account, Money market accounts, Fixed Deposits and government bonds.

Investing is usually done with money that is not required for a long term. So, if Peter suddenly inherits USD 10,000 from an aunt. He doesn’t need this money for now, so he decides to invest this money. He could purchase shares on the market, or purchase a real estate property. The money will be under a certain amount risk, and won’t be accessible for a long period of time. The primary amount can be affected, i.e.: in share market he can gain or lose, there is no guarantee.

Investment options include: Individual securities (shares, stocks), Mutual funds, Real Estate, Taxable or tax-deferred accounts, purchasing precious metals or stones.

Comparison between Savings and Investment:

 

Savings

Investment

Meaning

Keeping aside a part of your income regularly in order to deal with unexpected expenses.

Investment means putting your saved money in various products in order to earn returns and grow your wealth.

Time

Savings are usually used to meet your short term needs. Money is always easily accessible.

Investment generally entails a longer horizon of six months or more.

Risk

Lower risk

Higher risk

Reward

Lower reward

Higher reward

Liquidity

Easy

Difficult to liquidate at a moment’s notice

Types

  • Savings accounts
  • Money market accounts
  • Money market mutual funds
  • Fixed Deposits
  • Government Bonds
  • Individual securities (shares, stocks)
  • Mutual funds
  • Real Estate
  • Taxable or tax-deferred accounts
  • Purchasing precious metals or stones

Image Courtesy: candyusa.com, investingempire.com

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