Key Differences Between Investments and Savings
To grow your wealth, there are two main things to do that will help: investing and saving. They both typically have the same outcome, but the path of getting there is quite different. It’s important not to confuse the two, as these are two different methods of growing your wealth.
You’ve likely been told or read that the best way to take control of your finances is to save money and invest it. Do you know what to do, though? We break down the key differences between investments and savings to give you a better understanding of the two.
What is Saving?
At its core, your savings is the leftover money after you’ve subtracted your spending from your disposable income. You would then set this money aside, often in a bank account with interest, that you use only for emergencies or when you’ve reached a particular goal (family trip, mortgage, college, for example).
Saving is a smart step to take to ensure all your expenses are covered in case of an emergency. Putting the leftover money in a bank account can help prevent you from spending it on needless expenses. Plus, savings accounts can have various interest rates, which means your savings account slowly grows over time.
There are a few ways to build a savings account. Some families like to take a portion of their paycheque and have it directly go into their account. Others will deposit chunks at a time when they have enough money leftover.
What is Investments?
Investments are another excellent way to grow your wealth, and often people will use their savings to start an investment. With investing, you’re buying an asset that will increase in value over time. You would then have the option to sell the asset to make a profit. The goal is to increase your capital.
When you invest, you can do so in multiple ways. To start, investing could be buying a particular item or real estate whose value will only go up. Buy low, sell high.
Another option, and quite popular, is to invest in the stock market. Investing in markets can be through stocks, bonds and even currencies (forex trading). You’ll need a broker to connect you to the market for this option (for example, Indian forex brokers if you live in India).
Investing is an umbrella term for many options. Some prefer to day trade, which means they’re buying and selling stock within the same day to earn a small profit. Forex traders often do this and may use MT4 forex brokers. Others prefer to buy a stock and let it sit for years, but both options still grow your wealth.
Savings and investing often get confused because they have relatively the same purpose – to grow your wealth. They can go hand-in-hand, as many will use their savings to start investing or use their investments as a form of saving. However, as we noted in both sections, there are still fundamental differences between saving and investing.
A smart financial plan will utilize both options. Your savings with a bank is an excellent way to build an emergency fund, while your investments are an excellent method for creating long-term wealth.