Savings vs Investing: Which one is an ideal choice for a beginner? This question has been asked by thousand of people. The term saving and investing look similar to each other and hence most of the time they are used interchangeably. But if you get deep down into it, you will know that there is a thin line between the two terms.
People who are new to savings and investing should know the fundamentals of the two essential processes. Here, a simple question arises: should you start saving or investing or do both together?
In this blog, we will unlock the concepts of both savings and investing.
What is Savings?
Savings means the leftover money one deducts after the expenditure from their income.
Savings= Income - Expenditure
Saving money provides a sort of financial security as it will help people use them in case of emergencies and needs. Also, they can use this money for investments.
How to Start Savings?
Savings are usually done by putting money in monthly and yearly plans.
- Post Office Monthly Savings Schemes
- Public Provident Fund (PPF)
- National Pension Scheme
You can use any type of government-backed saving plan because of sudden huge expenses that go unrecorded. Hence, you are required to make a proper plan to save regularly and effectively.
The best possible way to start saving is by budgeting.
A budget is a plan of action that helps one to cut down several expenses and help him limit his spending on unnecessary expenditures.
If one is unsure about the limits of spending, you can use the following thumb rule 50-30-20 to start budgeting.
You can alter this rule as per your requirements and goals.
Pros and Cons of Savings
Pros
Savings remains unaffected by any events in the economy. Since it's not an invested amount, you can achieve your objectives as per the fixed schedule and a fixed amount.
Saving is the initial step toward investment. Also, it helps you to save money for your goals too in the most disciplined manner.
Cons
Because of the inflammation, the purchasing power of money can get reduced. Hence it can be suitable for short term tasks only.
Most savings plan offers low to moderate interest rates which can't be enough to beat the inflation rate.
One should use savings only if -
- You are saving for short term goals that don't require a huge amount of money.
- You are saving for the emergency fund.
- You don't have any immediate debt obligations.
What is Investing?
Although saving is necessary for financial security, there is another fundamental process for building wealth. I,e Investing.
Investing is the process of -
- Finding the fundamental goals.
- Researching the financial goals.
- Allocating our savings to create more wealth aiming at those goals.
How to Begin Investing?
As savings are usually done with government schemes, investing is mainly done through the stock market and mutual funds.
Investing is quite complex compared to savings, however with the right kind of knowledge, one can easily invest in the stock market through stock trading.
Investment should be classified as short term, medium and long term goals. Also, it depends on one’s risk appetite.
What is a Risk?
Risk is the amount you can afford to lose. It’s also known as an investor’s risk appetite.
Before investing in any stocks, you need to do a complete analysis of a company: fundamental analysis and technical analysis.
Fundamental Analysis: It is the process of analyzing the financial status of a company and the industry in which it is operating to make any investment or trading decisions.
Technical Analysis: Through technical analysis, you can analyze the charts with the help of patterns and indicators which are in turn used to find out the possible price trends in the future.
Pros and Cons of Investing
Investing helps you to combat inflationary pressure. Investing in the equity segment can make your money grow at a faster rate so that it can beat inflation in the future.
Investing beats inflation with a unique feature which is known as compounding of wealth. Hence, the earlier you invest, the more of your earnings will multiply with the passage of time.
Due to the growth of wealth, you don’t require to set as much money for a goal as compared to simply saving money.
Cons
Investing needs adequate knowledge, strong analytical skills and emotional intelligence. It requires a lot of practice to become a skillful investor.
Investments can be affected by a variety of factors such as company results, and economical events.
Hence, before investing your money in any financial instrument, one needs to study all the necessary factors for wealth building.
What is the Right Time to Invest?
Well, if you want to make your financial future secure, then investing is something that comes second to none.
The advantage that comes into play, you need to invest money for a long term of at least 10 years.
Therefore, one should choose to invest when -
- You are saving up for a goal for which you will need money for at least 10 years such as child marriage, retirement etc.
- There is a fall in the interest rates offered by the bank deposits and monthly savings plans.
Should You Save and Invest Together as a Beginner?
Here is an important point to note savings come before investing and never together. This is because, how will you invest if you don't save money for it.
If you are a beginner, who wants to save or invest money will be someone who has just started earning money.
If you are stuck in a situation, then you need to clear financial objectives and goals first. Once the habit of discipline is built, a beginner will find it to maintain that discipline for the investment as well.
The Bottom Line
Saving and investing are two terms that are interrelated with each other. Beginners who want to build their wealth, need to save their money first, build a successful financial plan and move on.
If you are one of those who have little or less idea about investing, then it's the right time to go for wealth managers as they will assist you in finding your goals and achieving them. There are many stockbroking firms that help people find their paths in investing.
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