Savings & Investing are two terms used interchangeably. They have different purposes and play different roles in your financial strategy making. It is very important to be clear on the fundamental concepts before you begin your journey of building wealth and finding financial independence.
Savings are usually put into the safest places or products that allow you to access your money at any time. Savings have almost zero risk of erosion and therefore the returns on savings are also extremely low.
However, the term Investing is a disciplined and systematic approach to making your money work harder and compound into a larger corpus over a long period.
Let us understand, why is it important to save and how is making an investment so important?
WHY SAVING IS IMPORTANT?
To begin with, savings and investments are not discrete subjects to be compared or contrasted. Let us understand the critical role that savings play.
- Savings are a must for your emergencies. You could lose your job, you may plan to start your own business or you may be hit by a medical emergency. In these circumstances you need liquidity and a liquidity back-up to fall back upon. That is why, it is always advisable to hold 5-6 months of your monthly earnings as liquid savings. In fact, it is the comfort of savings that allows you to invest more prolifically.
- Secondly, the process of investing begins with savings. Let us first understand savings as the difference between earnings and expenses. Here is where the first steps towards wealth creation begin. You must not look at savings as the residual but look at expenses as a residual. As your income grows, keep raising your savings target and work your expenses accordingly. Out of the money you save, allocate a small portion to liquid assets like bank deposits and liquid funds and the rest to long term wealth creation. That is why savings are so important.
- A good savings mix ensures that you do not have to break your investments at a future date unless the situation is absolutely demanding. Breaking your investments means that you miss out on future wealth compounding opportunities. Forced breaking of your investment could also have negative implications for your tax liability and to your long term goals pegged to these investments.
INVESTMENTS HOLD THE KEY TO YOUR FUTURE...!!
To put it mildly, investments bridge the gap between your goals and your current situation. Investing works on compounding principles and longer you stay invested, better it is. So here is why investments are so critical to your long term financial goals.
- Over a long time frame, the risk inherent in investments tends to get neutralized and works in favour of the risk-return trade-off of these investments. Even on a risk-adjusted basis, these long term equity investments tend to be much safer and more prolific.
- The investment in equity related products has two key advantages. Unlike debt, equity is best positioned to overcome the risk of inflation over a period of time. Secondly, a diversified product like a diversified equity fund is structured to capitalize on different economic cycles alternatively over a longer time frame.
- Normally, financial planning begins with a conservative estimate of equity returns. Over the longer run, they actually tend to perform much better. That means, the funding gaps in your plan automatically gets taken care of. That is very important considering that quite often your outlays cannot keep pace with your rising needs. That is where compounding comes in handy and that is why investments actually matter!
HOW TO GET RICH? IMPORTANCE OF SAVINGS AND INVESTMENTS
FUNDAMENTALS OF INVESTING
Download
