It is often recommended to start saving and investing right when you start earning. However, the two words are frequently used correspondently, owing to their common characteristics and significance in life.
Saving and investing require you to make changes in your patterns of spending, tracking, and using income. Saving money implies keeping the money available whenever an emergency arises, while investing means taking the money to a long-term horizon to achieve your future financial objectives.
This article will discuss the basics of saving and investing, the difference between saving and investment, and how to save and invest. With this write-up, you can also know about the benefits of saving and investment.
What is Saving?
Saving is simply a process of keeping a portion of your income aside for near-future expenses and emergency needs. It is necessary to keep a track of your savings, give yourself a deadline to save a certain amount, and add monetary value to specific goals. Your savings can serve as a rescuer in case of any emergency. Most banks and financial institutions in the UAE provide the facility to open savings accounts or fixed deposit accounts to secure money.
The major purpose of savings is to help you achieve your short-term goals or stay ready for financial emergencies. To begin saving, it is important to assess your needs and how much you can save monthly.
Benefits of Saving
The following are the pros of saving money –
- Savings enable you to easily access your money whenever required. Here, you can go for a notice deposit or a fixed deposit for saving. A notice deposit safeguards your money against sudden withdrawals. To withdraw the money, you need to give prior notice for the purpose of the withdrawal.
- With a fixed deposit, a savings account that enables you to select the duration for which you would save your money in the account, you can enjoy a fixed interest rate for the entire duration. The only caveat here is that the sum has to be kept as it is and cannot be withdrawn before the end of the tenure.
- Savings usually have lower risk as they are steady and are not reactive to the volatility of the stock market
- When you save your money in a savings account, you can earn interest on the balance and have your money grow transparently
- Generally, only a nominal fee is levied for savings instruments
- If you save your money in the bank, you would have the benefit of liquidity, i.e., the option to. withdraw the money whenever required
What is Investing?
Investing, unlike savings, means buying financial securities with an understanding that they will help you earn notable returns over time and enable wealth creation. At the same time, there is a degree of risk involved in investing your money in securities and other financial assets. Some of the major investment options preferred by most investors include equities, bonds, mutual funds, real estate, commodities like gold, and more.
The return you earn on your investment is earned as a profit on selling your assets. You can invest your income to generate wealth, pay for your child’s higher education, create a corpus for your retirement, or any other specific or general financial aim.
Benefits of Investing
- In the long term, investing generally provides a higher return on investment than a savings account
- An investment account allows you to decide how you want to allocate the funds. The investment decision can be based on your risk appetite and your chosen investment option.
- Generally, your investments can keep up with the inflation rate and help you avoid the depreciation of your wealth
- Owing to the power of compounding, you can generally accumulate wealth with investments. This, in turn, can help you meet your financial objectives and secure your future.
- Investing helps in inculcating financial discipline among investors. Regular investments not just help in accomplishing your financial goals, but also create a habit of investing and growing wealth. This habit can also help you maintain a track of your expenses.
- Investments usually offer higher returns than your savings account. When you create a balanced investment portfolio, the high-return assets can help you earn more when the market conditions are favourable.
Difference Between Savings and Investing
Presented below are the major differences between savings and investing in a table –
|Basis Of Difference
||Putting your funds in financial products or assets to earn higher returns and profits over time
||Setting a sum of money aside after catering to all the regular expenses
||Long-term financial goals like wealth generation, financing your child’s higher studies, creating a corpus for retirement, and more – requires long-term commitment and research from investors
||Short-term goals – works as an emergency fund
No need for exhaustive market research to save money
||Higher risk as the value of the assets can change as per the market volatility and other financial and economic aspects
||Low or negligible risk – steady interest provided without any major risk
||Generally low as you invest your money to earn higher returns in the long run –financial experts advise not to invest your emergency fund
||Generally higher liquidity – you can immediately access the money when required, especially if your money is in savings bank account
||You need to put your money in an investment instrument for the long term. Usually, the duration is 5 years or above.
||Generally short-term, and help you achieve short-term goals, and are highly liquid
||Equities, stock, real estate, mutual funds, and more
||Fixed deposits, savings bank accounts, recurring deposits, and more
||Tend to yield higher returns when the market condition is favourable
||Steady and fixed returns based on the interest of the savings’ instrument
|Protections against Inflation
||Protection of wealth against inflation
||Value of cash in the savings account reduces
||Time-consuming process – exhaustive market research required before deciding on a product and constant monitoring throughout the investment tenure
||Comparatively easy – you can easily open a savings bank account in a matter of few clicks online
How to Save and Invest?
The following tips will help you understand how to save and invest –
- Save Beforehand – Rather than saving whatever of your income is left after your financial obligations, consider setting apart a portion of your income beforehand. One way to do this is to set up an automatic transfer facility, where your money can be automatically transferred from the bank account to the savings or investment account.
- Save for Emergencies – You should set aside a portion of your money as an emergency fund. To avoid using the money for an emergency fund for expenditure, consider opening a separate account so that the fund does not deplete. You should save enough to cover three to six months of expenses.
- Create a Budget – With a budget, you can determine what are your necessary expenses and how much you spend on leisure. When framing a budget, list down your monthly income and expenses in detail to get a better idea of your cash flow. Besides income and expenses, you should also mention the debts in your budget. This can help you plan the repayment of your debts as soon as possible, which can avoid high interest rates or late fees, and leave you with more available funds to be used for savings or investment.
- Control Your Expenses – To initiate saving, you should first consider cutting short on your expenses. However, when you reduce your spending, don’t keep the savings liquid. Use the money to pay off a debt or transfer the money to a savings account.
- Take Small Steps towards Saving – This is one of the basic steps to learn how to save and invest. Once you have achieved a short-term goal by spending your savings, save the same amount or more than that so that you can make payments in cash rather than by securing a loan. If you are unable to save money for major purchases, it simply means that you are spending more than required. For this reason, you should consider making adjustments to your budget in small steps to avoid the stress of making significant changes at once. To purchase some things, for instance, you can find the item at affordable offline or online stores or look for discount coupons.
- Direct Your Money towards Investment – While it is advisable to invest your money in investment instruments to grow wealth over time, you should start with creating a pool of investments if you are an amateur investor. For this, you can consider investing in mutual funds. The goal in the earlier phase is to diversify without making the investment portfolio too complicated. Whether you are a new or a seasoned investor, you should invest only after considering factors like the time horizon for the investment, your financial condition, risk appetite, and so forth.
- Check Your Investment Plan – Even when learning how to save and invest, you should regularly monitor your investment plan, where you essentially draw an investment strategy that helps you know what instruments are worth investing in. It is recommended to review your plan at least once or twice a year. By regularly following your investments and updating your investment plan as per the changes, you can easily make wealth gains even amidst fluctuations in the market.
- Seek Assistance – Beginners are usually confused about how to invest and where to put their money. If this is your case, you can directly get in touch with a financial advisor to get clarity about the investments you should make as per your goals, current income and savings, and more.
- Saving is the process of keeping a portion of your income aside for near-future expenses and emergency needs. However, besides putting a part of the income aside, it also includes keeping a track of your savings, giving yourself a timeline to save a certain amount, adding monetary value to the goals, and so on.
- Savings enable you to easily access your money whenever required. Moreover, savings are usually not affected by the volatility of the market, meaning that their growth is steady and fixed.
- Investing, on the other hand, is the process of buying financial assets to earn significant returns over time and generate wealth. There is, however, a certain extent of risk involved in investing as you earn higher returns when the market is in favourable conditions.
- Investments are generally long-term products and allow you options as to what kind of investment product you want to put your money into. One of the remarkable benefits of investing is that it helps in inculcating financial discipline among investors. Regular investments not just help in accomplishing your financial goals, but also create a habit of investing and growing wealth.
- To learn how to save and invest, consider following the practice of creating a budget and saving a portion of your beforehand. You should also take work on monitoring your expenses and knowing the flow of cash in your budget.
- You should also create an investment plan and review it once or twice a year to see your progress in making investment decisions. If there is a need to make any adjustments, consider doing the needful.
- If you feel that you are stuck or confused about how you should buy your investment instruments, consider seeking assistance from a financial expert. For this, you can connect with us at policybazaar.ae and get resolutions to your queries from the leading financial experts in the UAE.