Many young adults who begin earning money are often advised to either do saving or investing.
However, before they do so, it is important for them to understand the basics of these two essential processes.
Moreover, an important question arises here – should a beginner ideally start saving or investing, or do both together?
In this article, we will answer this question by outlining the features of and the differences between saving or investing.
What is Saving?
Savings include the money that is left after one deducts their expenditures from their income. To put it simply,
Savings = Income – Expenditure.
Saving money is the first step towards financial security. When someone saves money, they can use it to –
- Protect themselves from emergencies;
- Build a corpus of funds for retirement; or
- Invest and make it grow more.
How to start Saving?
Savings are usually maintained with the usage of bank facilities like savings accounts and fixed deposits.
Apart from these, we can choose from a variety of periodical yearly and monthly savings plans like –
- Post Office Monthly Income Schemes (MIS)
- Public Provident Fund (PPF)
- Sukanya Samriddhi Yojana (SSY)
However, sometimes it can be hard to save money due to an influx of expenses that go unrecorded.
Therefore, we need to set out a clear strategy to save regularly and efficiently.
The best way to do so is to start budgeting.
A budget is a plan-of-action that lays down income allocations towards various expenses and helps us limit our spending on unnecessary expenses.
If one is unsure about the limits we should be setting upon our spending and savings, we can use thumb rules like the 50-30-20 rule to start budgeting.
Later, we can tweak this rule as per our needs and goals.
Pros and Cons of Saving:
- Savings remain unaffected by any events of the economy. Since they don’t fluctuate in value, we can reach our goals as per a set timeline and a fixed amount.
- Savings form the fundamental step of investment. If you don’t save, you won’t have anything to invest.
- Savings can help us save for goals in the most disciplined manner.
- Due to inflation, the purchasing power of our money can fall over time. Therefore, saving is most suitable for short-term goals only.
- Most savings plans do offer interest rates, but these aren’t high enough to counter the effect of inflation.
- You have to save a large corpus of money to reach big goals, as your money will not be growing over time.
When should you save?
The pros and cons that we read above show that there are only specific circumstances under which saving money can be useful.
One should, therefore, save their money when –
- They are saving up for a short-term goal which doesn’t require a large amount of money, like a vacation, etc.
- They are building an emergency fund, or saving up for retirement.
- They don’t have any urgent debt obligations.
- They want to invest in the near future.
What is Investing?
While saving is essential, more importantly, it is a stepping stone to another fundamental of financial security – Investing.
Investing is the process of –
- Identifying financial goals;
- Researching the financial products available; and
- Allocating our savings to create more wealth to achieve those goals.
The amounts we invest for profit and wealth creation are termed as investments.
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How to start Investing?
While savings are usually done with banks, investing is facilitated through the stock market.
Compared to savings, the process of investing is complex, but with the right kind of knowledge, one can easily learn how to invest in the stock market for beginners.
Investing for beginners should essentially begin with an identification of our short, medium and long-term goals.
Next, we need to understand how much risk we can take.
Risk is essentially the amount of money we can afford to lose, if an investment ends up making losses. It is also known as an investor’s risk appetite.
As per their risk appetite, beginners need to conduct an analysis of what kind of financial products can suit both their goals as well.
They can do this with the help of two analysis techniques –
- Fundamental Analysis: The process of analyzing the financial status of a company and the industry in which it is operating to make an investing or trading decision.
- Technical Analysis: The process of analyzing charts with the help of patterns and indicators, to identify possible price trends in the future.
Beginners can choose either one of these, or a combination of both these techniques, to filter out the best potential investments from the stock market.
Pros and cons of Investing:
- Investing helps us beat inflationary pressure. In fact, investing in the equity segment can often make money grow at a rate so high that it beats inflation in the future.
- Investing beats inflation with a unique feature known as the compounding of wealth. Simply put, the earlier we invest, the more our earnings will multiply with the passage of time.
- Due to this growth of wealth, we won’t have to set aside as much money for a goal presently, as compared to simply saving money.
- Investing requires strong knowledge, along with some basic analytical skills, and emotional intelligence. It takes intensive practice to become a skilful investor.
- Investments are affected by a wide range of factors like economical events, company results, etc. One has to study all the relevant factors to be successful.
- Investing returns come at the cost of proportionate risks. Returns are never guaranteed in any form of investing.
When should you Invest?
The benefits of investing mentioned before are of utmost importance if we want to have a financially secure future.
However, for these advantages to come into play, we need to invest money for a long-term horizon of at least ten years.
Therefore, one should choose to invest when –
- They’re saving up for a goal, for which they will need money at least ten years later, like retirement, child’s marriage, etc.
- There is a fall in the interest rates offered by bank deposits and monthly savings plans.
- They have thoroughly researched their risk and return profile, and have a clear timeline of their goals.
Savings or Investing: What are the differences between the two?
From what we have discussed up to this point, we can outline the following essential differences between saving or investing –
While savings refer to simply setting aside money for a goal, investment is the process of buying assets with these savings to grow our wealth.
Savings are mostly done for achieving short term goals, while some medium-term goals can be achieved through bank deposits as well.
Investments, on the other hand, are needed to achieve long-term goals, which have to be reached at least ten years from now.
Savings pose minimal risk, whereas when it comes to investing, one can find products offering products to suit different risk appetites.
Savings is usually carried out through bank accounts and deposits, and government saving schemes.
Investing is carried out through the various segments of the stock market, namely, equity, debt, and derivatives.
How to decide whether you should do Saving or Investing?
With this article, we can deduce that long-term goals should be backed up by investments and short-term goals should be achieved through savings.
Thus, one way of deciding whether we should do saving or investing in the type of goal we are setting money aside for.
Another factor affecting this decision is your financial situation.
Here, some elements of financial security, like an emergency fund, require savings first.
Also, if you are currently having some debt obligations at hand, you should focus on saving the required amount, and use it to pay off your debt.
However, in the absence of debt, you can concentrate your savings towards investing dedicatedly.
Lastly, another factor affecting this decision is the rate of return you are looking for.
If you are relying on higher returns on a sum of money to bring you closer to your goals, you need to invest your money. If not, savings products are adequate for you.
Should you Save and Invest together as a beginner?
An important point to note here is that, for a beginner, saving should always come before investing, and never together. Why?
Firstly, how will we invest, if we don’t save any money for it?
Also, as a beginner who want to do either saving or investing will be someone who has just started earning money.
At such a position, one needs to ensure that they first have their financial goals and priorities laid out for them.
While they figure out their goals, they should build the habit of disciplined saving.
Once the discipline is built, a beginner will find it easier to build the habit of investing in the near future as well.
Therefore, as a beginner, save first, build the required discipline and funds needed to invest, then invest.
As we saw through this post, we can come to the conclusion that both saving and investing are fundamental steps to ensure that we can be as financially secure as possible.
While saving builds discipline, investing helps us grow our wealth, provided that we know how to invest in the stock market.