Saving or Investing: Which one I Should Follow?

Saving or Investing: Which one I Should Follow?

You may go through this dilemma, Should I save or invest? The answer is simple. Saving money or investing depends on personal goals and financial stability. Saving and investing are two different things and have different roles to play. To choose between saving and investing, you have to understand how to achieve financial goals.

Saving money depends on your expenditure and risk profile. The guide below helps explore, how to work on saving and why investing is a good option. It also covers the basics of personal finances (savings and investments), so that you can enjoy a good lifestyle and fulfill dreams and goals.

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Saving or Investing: Which one I Should Follow?

Saving Means:

Saving is money a person earns, which he doesn’t spend. Putting money aside from monthly income helps build funds. Saving money helps become financially secure and provides a financial cushion to fall back in case of an emergency. Saving money can help you invest in an emergency fund or crucial investments for financial goals.  

Saving can be defined as the process of setting aside money and keeping it in safe and liquid securities. This includes savings bank accounts. You can deploy the money immediately, without any delay.

Investing Means:

Investment is the process of using surplus savings to invest in financial instruments or assets that help generate income. Investment means diversifying savings into different financial instruments to gain profitable returns in the future. There are mainly four types of investments. They are as follows:

• Growth investments: A growth investment refers to investment options like mutual funds and equity shares. These are suitable for investors who have an appetite for risk and are able to understand the products as well as the stock market. This investment gives exponential returns and is beneficial when invested for longer periods. However, the returns are not assured as the stock market is highly volatile. These are one of the riskiest investment options, but when handled with expertise, they can give higher returns than most other investments.
• Property: Property or real estate is one of the best investment options that enjoy excellent growth. Property is considered to be a growth investment, as the price of the house rises substantially over the medium to long term. Selling property takes time. Property investments have less liquidity.
• Cash investments: Cash investment refers to saving money in the form of high interest savings bank accounts. These investments carry the lowest potential returns among all types of investments. While they offer no chance of capital growth, they help nurture the habit of saving and can play an important role in protecting wealth and reducing risk in investment portfolio. It also helps create emergency funds. These types of savings are easily accessible in case of an emergency and help reduce borrowings.
• Fixed interest investments: These are the safest types of investments. The best known types of fixed investments are bonds and fixed deposits. The investor invests and gets assured returns as they are not subject to market fluctuations.  These investments generally offer lesser returns and involve lower levels of risk vis-à-vis shares or equity mutual funds.

SEE ALSO:  Investing Means

How much should I Save?

Plan the monthly budget and do not forget to consider monthly expenses and the needs of your family. Think of a realistic budget and use money wisely. In India, people effectively save by setting aside 20% of their salary. You can follow this thumb rule:

You can save money from your salary each month by following the 50 – 30 – 20 rule. Divide your monthly income into three parts. The first 50% of your salary will go towards necessities like home rent, home loan EMIs, grocery and so on.

The next 30% of your income must go towards your needs. Devote a budget for the things that you need to buy. The remaining salary i.e. 20% should go towards your savings.

Savings can be of different types and can also include investments. If you have a good salary, then you can save easily by setting aside unused money. However, if you have a moderate salary, then you must cut down on unnecessary expenses and avoid splurging. You should also avoid debt and follow a strict monthly budget.

Save for Emergency Fund:

We basically save because we cannot predict the future. Saving helps remain financially prepped for any emergency, which might arise in the daily course of life. There could be a number of things or necessities for which you need to set money aside. 

Saving money doesn’t come naturally and is a habit that must be nurtured. This will provide you with a financial cushion and you can finance the different necessities like purchasing a car, a down payment for the purchase of a new apartment, a vacation or sudden medical expenditure of family members. A saving like this is known as an emergency fund, which can be availed and deployed in times of emergency. It is important to save money to avoid falling into debt.

How Much Should I Invest Money for Future?

You must acknowledge the fact that investments in various financial instruments like NSC, PPF, mutual funds, equity are the best options for creating wealth. To help stay motivated, you must first identify and set specific investment goals. This will help save money. To set your investment goals, first categorize your goals into short term goals, mid-term goals and long term goals.

You may save money each month in your bank account, but it is tempting to withdraw money if you are saving without any specific purpose. So, setting goals helps retain or hold the money, for that specific purchase or the goals that you wish to meet. Determine what you are saving the money for i.e. short term as well as long term. You then need to develop a goal chart where you can write down financial goals, and decide whether they are for short term, moderate term or long term. Determine how much money you need to fulfil these goals, write down ways through which you can save money.

Short-term goals: A short term goal refers to a goal that you want to accomplish within a short period of time. Short term financial goals are the goals that you want to fulfill soon. Short term goals include creating an emergency fund, making a fixed deposit or saving money to fund a purchase.

For accomplishing short term goals you must save money in a savings account or you can invest in fixed deposits of one year term. For short term goals it is better to avoid investing in equity as there are high chances of losing money.

Medium-term goals: A medium-term goal ranges from one year to 3 years. Medium term financial planning involves a course of action that can be achieved after a year or a couple of years. This type of planning involves saving continuously for a slightly longer period and accomplishing goals over a period of a year or two.

Medium term plans include various expenditure like down payment for purchase of property or investing in various tax saving investments of medium term to be financially equipped for the future.

Long term goals: A long term goal is something you wish to accomplish in the future. Long term investments and financial planning involves investments of 5 years and above. Long term goals are the plans that require time, planning and patience. For long term goals you must consider inflation in your calculations. Long term investments include NSC, PPF, retirement plans or pension plans. Long term goals can also include purchasing a property or your own home.

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