Difference Between Saving and Investing

Difference Between Saving and Investing

A smart person is something relative. If you do that well with people, then you are described as “someone smart”. If you are good with linguistic, then you are “smart with words”. There are a whole lot of examples to give, but we’ll like to narrow down our focus to financial literacy.

You need to have a certain level of literacy when it comes to money, or you’ll suffer bankruptcy. On a more specific note, we’ll be discussing the difference between investing and saving.

As similar as these two positive money practices may be, you need to know that they are different. We’ll get into that in a moment, but before, let’s see how the definition of these terms can make a difference between saving and investing.

Definition of Saving

Saving is defined as setting aside some money for future purchases or emergencies. More often than not, it is in the form of cash at hand or deposited in the bank and can be accessed faster with little or no complication. This has been known to save many from financial problems and has helped them lead a better financial life generally.

This practice has been in existence for as long as legal tender has been a thing. In the olden days, people used special pots, boxes, mattresses, pillows, treasure chests, war bonds, etc. to save their money. They also saved their money in gold.

Interestingly, the use of gold to save money is still very much in existence to this day in addition to other saving plans offered by different financial institutions today. Here are some notes on saving to take to better understand the differences when saving vs investing are compared.

  • Period

It does not usually extend for a long time since it is typically for meeting small financial objectives.

  • Access and risk

The level of accessibility to your savings is usually very high with little or no risk.

  • Returns

Because it is not an investment, the interest earned from bank savings is usually low or negligible even.

Definition of Investing

Investing can be defined as spending money on assets with the expectation of making more money from them. The assets can be anything ranging from stocks, real estate, mutual funds, bonds, or even starting a small business.

From these definitions, one can see how investing vs saving are somewhat similar. They are both aimed at increasing money. However, the difference between the two is quite clear. To achieve the latter, you would have to set money aside consistently.

But to achieve the former, you would have to spend the money on assets that can yield you more money. This can be considered keeping vs wise spending.

Let us take a look at some of the features of investments.

  • Period

Typically, it is a long-term plan for larger financial goals. It might even be a lifelong fruitful venture.

  • Access and risk

Access may not be fast depending on the type of investment in question. Generally, it may take a long process to liquify. Also, it comes with an inherent risk.

  • Return

Saving vs Investing Comparison Table

Here is a brief summary that can answer the question – “how is investing different from saving?”

Basis of ComparisonSavings Investing
Meaning Putting aside a certain amount of money towards achieving a particular future goal Spending money on assets that can bring back some profits/benefits in the future
Purpose To meet short term and urgent financial requirements Long term financial appreciation of assets
Benefits No profit. Just what was saved Compound return of profit over a long period of time
Tax No tax payment expected Expected to pay tax most of the times
Inflation The value of the money may depreciate as a result Has the ability to combat with inflation rate
Examples of differences between saving and investing Can be done only by putting away money, either in liquid, in a bank account or other forms of savings account A new business, stocks, real estate, etc.

This table is a good summary about the difference between saving and investing. It contains all the fundamental information about the two.

Conclusion of the Main Difference Between Saving vs Investing

It is important to cultivate these financial habits because they pay big in the long run. Try to set aside at least 20% of your income per month, not necessarily to satisfy your desires, but to meet your needs and accumulate cash for investment. It may be challenging, but you’ll be glad you did so over time.