In India, most families teach youngsters the importance of savings and investments from a young age. Many age-old Indian fables and adages also highlight the importance of savings.
However, many people tend to overlook the fact that savings are not investments. While savings can be an effective first step towards beginning the investment process, considering them as investments can be a recipe for financial mismanagement that can result in the underutilisation of funds or losing investment opportunities.
Why Are Savings Not Investments?
Ineffective Against Inflation
Inflation is the silent destroyer of wealth. While you work hard and live frugally to save as much as possible, the value of your accumulated savings keep reducing with time as the cost of basic amenities and services keep moving upward due to inflation.
The decreasing interest rates of traditional saving instruments like bank savings account doesn’t help either. As a result, you keep saving more, and the vicious cycle of wealth destruction continues.
On the other hand, investment aims to tackle inflation head-on by focusing on investing your money in returns that might beat the rate of inflation.
Inseparable from Daily Expenses
One of the many advantages of saving instruments like bank or post-office savings account or FDs is high liquidity. You can easily withdraw money from such accounts in a time of need or crisis.
The arrival of ATM cum Debit cards, digital wallets and UPI have further eased access to the money parked in your bank account. Also, you can efficiently perform online transactions where you buy something and pay directly through plastic money or digital banking.
However, the flip side is the fact that lines between savings and spendable money have been blurred. More often than not, people tend to spend the money meant for savings to indulge in buying non-essential items.
On the contrary, most investment plans do not provide high liquidity in the short term, which is a blessing in disguise. Most investment plans require you to invest a stipulated amount towards building an investment portfolio regularly.
Hence, your portfolio gets better chances of consolidating and compounding when left untouched for a considerable period, say 20 to 30 years.
No Provision for Insurance
The principle of savings works on the assumption that you can continue to work and earn for a long time. Therefore, saving principles can often ignore the fact that there can be an unfortunate situation where your family must survive without you.
However, smart investing can also include insurance into your portfolio, giving you the dual benefit of investing. You can choose insurance products that can work as long-term savings plans while providing you and your family adequate insurance cover.
Savings is an indispensable part of your personal finance and can work wonders in preserving capital. However, you must not confuse it with investment which allows you to grow your wealth. Simply put, you need savings to sustain your short-term goals, but you will need investments to secure your future.