An average Indian’s savings can be as high as 30% and investment is well below 30%. On the other hand, high net worth Indians have investments well over 50% (Refer ET article Use Mutual Funds to fill the void in retirement planning). As a result, the financial gap between rich and common man is increasing continuously. One needs to do both saving and investment to survive and thrive financially.
Saving and investment may sound similar but they have a lot of difference. The difference is analogous to defenders and forwards in soccer.
Saving money is to keep a portion of your money to ensure that you are able to survive or to buy something in the near future. For instance if you are salaried and you are the sole bread earner for your family then you should have at least a few months (~6) of your salary in saving so that you and your family can readily extract the money if you lose your job one day – as usual you will need to buy grocery, pay for medical bills, pay for children’s education etc.
Some of the areas which may be called saving:
- Saving to cover yourself if you lose your job (this may be a liquid instrument such as Fixed Deposit).
- Saving to provide income to your family if you died unexpectedly or meet an accident or a family member needs medical care. This risk and thus need for this saving can be transferred to insurance companies through term insurance, personal accident insurance and medical insurance.
- Saving to plan for a social gathering in your house such as religious functions (Fixed Deposits and saving account)
- Saving for vacation this year
Investment is to pull out the excess of your money after saving and spend that money to gain bigger benefits. The benefits can be obtained by using time value of money or by contributing to build and sell products/services to other people. Investments yield higher returns than savings but they carry the risk of losing the principle.
Some of the areas which may be called investment:
- Mutual funds and other investment funds/bonds (these work both by time value of money and contributing to product/service)
- Executing or participating in execution of a business (entrepreneur, equities)
- Real estate