The difference between saving and investing –

difference between saving and investment

Save refers to the part of income that is set aside that is not used in consumption, i.e. whatever is left in one’s hands after paying all expenses. On the other hand, Investation is the act of investing saved money into financial products, with the intent to earn a profit. This alludes to an increase in the capital stock.

Also read: Difference Between Income and Profit

For a firm, investment connotes the production of new capital goods, such as plant and machinery or changes in inventory. Many people juxtapose saving with investment, which is simply not right. Saving is a factor that determines the level of investment made. In this article, we have rounded up the difference between saving and investing. Come on, let’s see.

Definition of Saving

Saving is defined as that part of a consumer’s disposable income that is not used for current consumption, but is set aside for future use. It is made to meet unforeseen situations or emergency requirements. It makes a person strong and financially secure.

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There are several ways that one can do to save money such as, collect it in the form of cash holdings, or save it into a Savings account, retirement account or in any investment fund.

The stepping stone to wealth formation is saving which is determined by one’s income level. The higher a person’s income, the higher his ability to save, because an increase in income increases the tendency to save and decreases the tendency to consume.

It could also be said that it is not a person’s ability to save that drives him to save, but the willingness to save that compels him to do so. Willingness depends on several factors like his attention or financial background, etc.

Also read: Differences between IMF and World Bank

Understanding Investment

The process of investing something is known as Investing. It can be anything, for example money, time, effort or other resources that you exchange for future profit. When you buy an asset with the hope that it will grow and provide good returns in the years to come, it is an investment. Current consumption should be abandoned to get higher profits later.

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The ultimate goal working behind investment is wealth creation which can be in the form of capital appreciation, interest income, dividend income, rental income. Investments can be made in various investment vehicles such as stocks, bonds, mutual funds, commodities, options, currencies, deposit accounts, or other securities or assets.

Since investing always comes with the risk of losing money, but it is also true that you can earn more money with the same investment vehicle. It has a productive nature that helps the economic growth of the country.

The difference between saving and investing

The difference between Saving and investing is explained in the following points:

  1. Saving means setting aside some of your income for future use. Investment is defined as the act of putting funds for productive use, i.e. investing in such investment vehicle which can generate money over time.

  2. Saving to meet unexpected expenses or urgent cash needs. Instead, investments are made to generate returns over a period that can aid in capital formation.

  3. With investments, there is always a risk of losing money. Unlike Saving, where there are no or relatively few opportunities to lose your hard earned money.

  4. Undoubtedly, investing gives a higher return than Saving, because there is a nominal interest rate on Saving. However, investments can make more money than the amount invested, if invested wisely.

  5. You can have access to your Savings account, anytime as it is highly liquid, but in case of investment you cannot have easy access to money because the investment selling process takes time.

Saving alone cannot be an increase in wealth, because it can only accumulate funds. There must be a mobilization of Saving, that is, using Saving for productive use.

There are several ways to channel Savings, one of them is by investing, where you can find unlimited options to invest your earnings. Although risk and profit are always associated with it, but if there is no risk, there is no profit.

Since excess of anything is bad, so is the case in Saving and investing, it is important for the economy that Saving and investing must be done in the right proportions. Saving more than investing will lead to unemployment and inflation.

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