In an era of grave economic uncertainties, the appropriate management of finances has become an extremely challenging task. Not only are you required to invest in a diverse set of instruments, but you are also expected to save for a variety of unforeseen exigencies. This has created a situation where the interest in both savings & investments, has steadily begun to witness a continuous rise.
However, as per a recent survey released by National Bonds, almost 85% of the consumers in the UAE are either not saving or investing enough. This is primarily because most residents and expats still remain unclear about the key differences between both of these mechanisms.
If you too are wondering what the process of savings or investments actually entails, here is a detailed guide to understanding their key distinctions and similarities –
What Are Savings?
To put it simply, savings basically include the total amount of money that is left after all the necessary expenditures from disposable income have been incurred. Instead of spending this money, it is usually put aside to meet various kinds of unexpected future emergencies.
In order to save money, you can hold it in the form of cash, deposit it into a bank or place it in a savings/pension account.
What Are Investments?
Sometimes the amount leftover from disposable income is not used for savings. Rather, it is used to purchase tangible or non-tangible assets that have the capability of generating long-term returns. This process of utilising the capital for buying appreciation-worthy assets is called investments.
For investing money, you can buy instruments like mutual funds, bonds, stocks, real estate, derivatives, or even gold.
Savings Vs. Investments – Key Differences
|Meaning||Investing is the process of using the spare money to aid wealth creation
|Saving is the process of putting money aside to meet unforeseen exigencies|
|Examples||Stocks, mutual funds, derivatives, T-bills, gold or property
|Savings account, pension account, cash holdings, liquid fund accounts|
|Objective||To generate returns and facilitate capital appreciation
|To meet short-term or long-term needs and requirements|
|Lower/ Nominal returns|
|Risks||Extremely high or high risk
|Low or negligible risk|
|Liquidity||Less liquid – available after a lock-in period
|Highly liquid – available immediately|
In other words, whenever you put aside money with the hope that it will come in handy for future uses, it is considered to be savings. On the other hand, whenever you put aside money with the expectation that it will grow, it is considered to be investments.
The Way Forward
Savings are primarily the foundation stone upon which the success or failure of your wealth creation effort rests. However, on its own, savings can only help accumulate funds. It is investments that actually mobilize these funds and put them to good use. The risks and returns associated with both these instruments equip people to use their money in a productive, efficient, and sustainable way. This is precisely why understanding their differences and acting upon them in the financial markets, holds great significance.