First of all let me explain that both Saving and Investing means accumulating money, each one is used for different purposes as per our requirement. I will discuss few important points regarding Money Management here:
- Liquidity: Liquidity is higher in Savings but Liquidity is lower in Investments. Now what is liquidity? It’s nothing but cash. You can take out cash as and when required from your Savings i.e, Short term FD, Short term RD, Money in your Savings account or Cash in Hand etc. But in the case of Investments cash cannot be taken out easily.
- Time Frame: Savings are required for achieving your short or near term goals. Let’s assume that you have planned to purchase an iPhone or a laptop or planned a vacation to your dream place. For that you will need money and you can use your savings for achieving your short term goals. So, we can conclude that Time frame for any kind Savings is less than 2 years. Investments are required for achieving your long term goals. Let’s assume that you have planned to own as House or property, for an International tour, for Higher education of your child, for marriage of your child, to create a huge corpus of 7.5 Crore (1 Million US$) for your retirement etc. For all the above mentioned long term goals, huge money is required & you have to plan your investments for the long term. So, we can conclude that Time frame for any kind of investment is more than 2 years.
3. Risk: Risk is low in case of savings but risk is high in case of Investments. Except cash in hand all other forms of Savings have Fixed interest rate. So, there is almost no risk with exception in case of Bankruptcy of a bank. But in the case of Investments ROI(Return on Investment) is variable. You have to be careful as wrong investments can give negative returns & there is a chance of losing your principal amount too. For eg. investing in penny stocks without knowing the stock market can be a blunder. Following others while investing in the stock market or putting all your money in one stock can result in a great loss.
Return: Return is low in savings as risk is low and return is high in Investments as risk is high. In a savings bank account you can earn interest rate up to 3.5% & nowadays banks offer interest rates from 5-5.5% for short term RDs & short term FDs. With the imposition of taxes on interest earned on FDs, returns come down further & it cannot even beat inflation. There are several schemes of Govt. of India providing fixed but handsome interest rates such as PPF(Public Provident Fund-7.1%), Sukanya Samriddhi(Only for girl child-7.6%, NSC(National Savings Certificate-6.8%). All the above investments have different investment periods & are very safe with no volatility. Although returns are good in comparison to other savings schemes, all your long term goals cannot be fulfilled with rising inflation. Average inflation rate of India since 2012 is 5.99% until 2021. So, investments with ROI of above 10% can be considered as a good investment for a longer period of time. Investment on commodities such as Gold and Real estate property such as land, House etc. and Investment on equity such as in Stocks or in mutual funds can generate much higher returns 12-15%. Also much higher returns can be generated from the Share market with proper knowledge & good emotional intelligence. Although returns are attractive in Commodities, Real estate & equity but risk is much higher. So, we can conclude that Return is directly proportional to the risk taken.
Do you remember the 50-30-20 principle as discussed in my previous blog post. 50% of your income should go for your needs, 30% for your wants & 20% for your investment. Although it can vary depending on your income Now, can you relate this to Savings & Investments. For fulfilling your wants you should do savings and for fulfilling your Long term goals & dreams you should do investment & both are very very important for financial stability. One of the most important point of savings that is not discussed yet is to build an emergency fund or corpus. The least amount required for an emergency fund or corpus is six times of your monthly expenses & it is very crucial indeed. These are a few very important points about money management.
