The Difference Between Savings And Investments
Financial Independence, Investment, Saving Jun 25, 2020
Savings and investments are often used interchangeably, however, they are two very different tactics to reaching your financial goals.
Understanding the concepts of saving and investing, and knowing the difference between the two, will set you up for financial success.
When you put money in your savings, you are storing money in an easily accessible place for a specific purpose or for a rainy day. A very important characteristic of savings is that they are liquid and can be accessed on very short notice.
Another key characteristic is that savings are used to achieve smaller, short term goals. Savings provide the capital on which you build your investment.
For larger goals, it is more ideal to invest your funds in long term investments. Investments entail more risk than saving because they are often put towards bigger businesses that have more time to grow. Therefore, it is very important to understand the specific instrument you are investing your funds in.
At Overwood, fund security is our number one priority so we only invest in instruments that provide high principal safety. When we manage your funds, we ensure that you do not lose money. Our detailed investment guidelines can be found here.
Let’s compare savings and investments at a glance.
Savings vs Investments
|Duration||Savings are used for short-term goals like creating an emergency fund or preparing for an upcoming vacation.||Investments help you reach long term goals.|
|Interest rate||The interest rate on savings is usually fixed, however, they do not generate returns beyond the level of inflation. Although interest in savings is fixed, it is usually so low that it doesn’t count as a source of income, and the value of your funds may depreciate due to inflation.||Investments offer higher returns than savings and with the power of compounding, the value of your funds increases over time. The potential returns of investing are higher than that of a savings account.|
|Liquidity||Savings are highly liquid and readily accessible when needed. They are best used for emergencies.||Investments are usually illiquid for a certain period of time and may attract a penalty if you try to liquidate them.|
|Risk||With savings, you run less risk of losing money than with investments. However, investments offer higher rewards than savings.||Investments are riskier than savings and offer higher rewards in return for the risk.|
Savings and investments are two important aspects of money management and knowing which tactic to use per time will help you reach your financial goals.
What other difference exists between savings and investments? Share with us in the comments below.