In my previous post i.e.Investment Definition and Explanation, I gave you an idea and constructed a definition of investment in terms of Personal Finance. Now we further discuss the difference of Savings and Investments, and how we can chose between Savings and Investments based on these differences.
Difference Between Savings and Investment
Intent or Purpose: First difference is based on the intent with which money is kept aside for either Savings or Investment. Savings is the money or any other asset set aside with an intention to remove risk of loss, or buy something in the future etc, and NOT without any profit making intentions(except very nominal returns on savings which only cover expected inflation). Whereas Investment is purely with an intention to use money or any other asset with a hope to generate income in the future or a capital gain, and risk is an integral part of every investment.
Where Implied: Savings is mostly done with Banks, Other financial institutions or even at home in the form of Cash. Whereas usage of Investment is varied, i.e. investing in stocks, bonds, real estate etc.
Time: Time is another factor that differentiates between Savings and Investment. Savings are generally for a shorter period of time, with an intent to accumulate a certain amount of money. Whereas Investments are done, generally, for a longer period of time, and by a person who has a longer time horizon in his mind.
Source: Another very interesting difference that I have thought of, is the source of funding for Savings or Investments. Savings are funded, generally, by either reducing your current expenses or doing some extra work to have that extra amount available for Savings. Whereas Investments may have varied sources of funding. You may take a loan to invest, And of course you will never take a loan to Save, or you may use even your extra Savings for investing which normally many people do.
Returns: Value of Investments may fall or rise and you may not get your original investment back. Whereas in Savings you always get your original investment back (though its actual value might have been hampered by increased interest rates or inflation).
People save or invest money based on factors, such as availability of funds, sources the funds are coming from, liquidity and Risk and Return trade. Future forecast is another critical reason that helps in the decision of either Saving or Investing.
I like this post a lot, in that it is one of the few articles around that meaningfully differentiates between saving and investment. To me, saving is simply the difference between current income and expenses. Investing is the process of choosing where to put your money, which as you point, may or may not have come from savings.
ReplyDeletethank you S.B. you are absolutely right with your argument. people generally mix savings with investments. this becomes more critical when they actualy plan to save/invest.
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