Understanding the difference between Investing and Saving

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Understanding the difference between investing and saving
Many people often confuse the terms - Investing and Saving. Some of you may even think it means the same thing. However, there is a fundamental difference between the two. Saving is the process of storing money and protecting your principal whereas investing is the process of putting your money to work by finding ways to create additional money on top of the principal.

The crucial question however is, do you invest or do you save? You may often wonder whether you can only be a saver or an investor, or should you be a mix of the two. The answer to the above lies in your ability to tolerate risk and the reward that is associated with each.

Often on speaking to elders you would sense the innate distrust they have with any sort of investments. Their policy would have understandably been safety first as they strived to protect their money. However, they missed one key aspect - inflation! Money sitting in a bank earning for eg: 7% per year is worthless if the inflation that year was 8% as you have now earned a negative 1% return to your savings. Many middle class families have had to bear the brunt of inflation on their savings especially during their retirement years. This makes you think that even though saving it in a bank or storing it under your mattress is the safest option and can provide you with liquidity at the time of a cash crunch, just having "savings" might not the best option for you.

So when do you start investing then? How much should one invest? What should be the ideal amount one should save before starting to invest? These are all questions any one would grapple with when it comes to personal finance. It is always wise to consider "savings" to be the strong foundation which would give you the freedom to make "investing" decisions. Many in haste of reaching the objective of complete financial freedom invest all their money in risky assets which can set you back in debt for a long period of time if your investments go awry.

Your first step ideally should be to have your "savings" able to cover all personal expenses, rent, EMI payments, health insurance, life insurance, utility bills, food and clothing expenses for a period of atleast 1 year plus a certain amount saved up every month for any long term buys like a house or a new car. In worst-case scenarios this will allow you to have enough breathing space to make monthly payments.

Once this aspect is taken care of, you can finally start looking at the investing options available. These days you have a host of instruments to invest in ranging from Equities, Mutual Funds, ETFs, Gold, Commodities, Bonds, Derivatives etc. We at TriVest Folio (https://www.trivestfolio.com) recommend, at the time of building your portfolio of Mutual Funds and ETFs, to always make it a habit to set aside a certain percentage of your amount in pure cash as "savings" since only a strong foundation with "savings" can give you the freedom to choose your investing options and get you on the path to complete financial freedom.

At the end of the day you want to be able to make your money work for you and that can be done only through a judicious mix of "savings" and "investments". In all its simplicity, the goal should always be to spend less than what you earn, build your savings and use those savings to make investments that can provide you with good returns. It is easy to say and tougher to follow but every financially free person has reached that stage through the same technique and so can you through a mixture of discipline and enterprise.

Happy investing/saving!

Sandip Southekal is the Co-Founder of TriVest Folio - https://www.trivestfolio.com a personal investment tool to help build a diversified portfolio of Mutual Funds and ETFs

Read more about: saving, investing
Story first published: Wednesday, September 25, 2013, 8:37 [IST]
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