As a means to make available funds for current or future requirements, both Saving and Investment offer multiple opportunities to an investor, though there are certain underlying difference between them.
Savings typically refers to the money that is kept aside from one’s income, perhaps every month, once all the expenses have been paid for. This can be done at predefined regular intervals to accumulate a fund that can be tapped in case of any emergency or to meet any un-expected requirement of funds. A person’s saving usually are used to meet a short term need for funds.
An amount that is saved in comparatively low risk or highly secure financial instruments or products like savings account, checking account, certificates or fixed deposits are usually referred to as savings. The money kept in these type of secure environment usually yield negligible results, though the lump sum amount remains secured throughout the period.
When it comes to liquidity however, the savings are completely liquid assets. Taking minimum amount of time to make funds available, it is the most accessible form of funds. For example a fixed deposit with the bank can be “broken” or terminated to make the money available in the person’s bank account almost instantaneously.
Another form of saving that can be taken into consideration, which is considered equally save is the saving bonds issued by the U.S. Department of the Treasury. To fulfill borrowing needs of the government, often saving bonds are issued to the general public. These are also one of the safest method of saving money as it is backed by the government’s promise of a payback. In case these bonds get stolen or is lost by the bond holder, they can be replaced by the treasury department.
Investing, on the other hand, is an act of putting the money saved post incurring all the expenses for the month into financial instruments that have the capacity of yielding higher returns and have greater associated risks. The intent here is to grow the wealth invested by a person. There are three major types of investments that are usually considered by the people. They are: Ownership investment, Lending Investment and Cash equivalents.
1. Ownership investment is the most widely popular term that is referred to when people talk about investing their funds. Some examples are:
i. Stocks: these instruments actually give partial ownership (equivalent to the stock held by the owner) of the company in which the investment is done. The return on the investment here is by the means of the market valuation of the stock that is owned by an individual.
ii. Starting up an entrepreneurial venture by investing into it is also an ownership investment. This type of investment while having the potential of giving back large returns if successful, also require much more than just money to be successful.
iii. Investment in real estate is also another form of ownership investment
iv. Investment in precious metals such as gold, silver, antiques etc.
2. Lending Investment:
These instruments are the ones that enables an investor to act as a bank and grow money by lending it. A savings bank account or investment in bonds would be a popular example of this category. This category of investments, while very safe, offer limited returns. But at any point in time, the principal amount of the investment remains safe and un-touched.
3. Cash Equivalents:
These are the most liquid form of investments, or the most readily available or easily accessible funds. An example of this kind of investment is the Money Market Funds. With the money market funds too, the return on investment is very small.
Thus while comparing saving and investment, we find that principally savings are short term, secured and easily liquidated means of putting away money that may be required for use during an emergency. Investments, on the other hand are long term money making tools that are availed for growing funds faster and have higher associated risks.