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Saving and investment – these two terms are often used interchangeably by people from different walks of life. While their core purpose is to help secure your financial future, you must know about the difference between saving plan and investment plans.
Ideally, every individual should be engaged in both savings and investments as a part of future planning. However, a specific financial plan that involves both savings and investment components may work differently for different individuals.
Hence, it is crucial to understand the difference between investment plans and savings as early as possible in life. Let's cover this aspect in detail.
Difference Between Investment and Savings
There are several faces of financial security in an individual's life. But when it is about carefully assessing the differences between savings and investment plans, many people fail at the start of the assessment process.
Saving money typically implies putting an amount aside for later use without facing any risk of losing its value. Investments, on the other hand, take into account a long-term approach for a specific financial goal. The most foundational difference between savings and investment plans is a risk.
Let's talk about some of the prime differences between investment and savings.
1. Access to the Capital
In critical situations like a medical or financial emergency, savings work as handy cash. You can easily access or use the money you have been saving for a long time. It is up to you to withdraw a part of your life-long savings or the whole amount at once.
This access to capital is a key difference between savings and investment plans. When you invest money, you may lose this quick and easy access to your capital, depending on the types of investment options you choose.
For instance, investing money in open-ended equity mutual funds gives you the facility to redeem your investment at any time. The same is not true with ELSS, which comes with a lock-in period of three years.
1. Access to the Capital
In critical situations like a medical or financial emergency, savings work as handy cash. You can easily access or use the money you have been saving for a long time. It is up to you to withdraw a part of your life-long savings or the whole amount at once.
This access to capital is a key difference between savings and investment plans. When you invest money, you may lose this quick and easy access to your capital, depending on the types of investment options you choose.
For instance, investing money in open-ended equity mutual funds gives you the facility to redeem your investment at any time. The same is not true with ELSS, which comes with a lock-in period of three years.
2. Purpose or Goal
Another crucial difference between savings and investment plan is the purpose or goal they have been chosen for. Savings are meant for smaller goals to be achieved within a short time. For example, if you want to go on a foreign trip with your spouse after two years, saving a small amount every month can easily help fulfill this goal.
Investments play a significant role when a long-term plan is to be followed to achieve bigger goals. Child's higher education planning is a good example of it. The goal is to have enough funds ready until a small kid makes a plan for higher education. Investing money for this goal is a better option as there is a long period for your money to grow.
3. Risk Factor
It is another significant difference between investment and savings that determines an individual's financial decisions. One reason why people keep their money in their bank accounts is the lower risk of losing money. There is minimum risk involved when you take the savings route for financial planning.
Investing money, on the other hand, may involve risk, which is multifaceted. It is related to the possible loss of money or potential returns pertaining to the impact of market conditions on your investments. If there is anything that differentiates savings vs. investment plan, it is this risk factor.
The risk in investing money varies as per the financial instrument you choose. For instance, the associated risk factor is different for direct equities and equity mutual funds. Investing wisely is crucial to balance the risk-to-return ratio. That is why people seek help from financial advisors for long-term financial planning.
Also Read: What is Financial Planning?
What are Savings Plans?
Savings plans are life insurance products that help individuals earn guaranteed returns in return for disciplined savings. They are meant to help you begin a savings journey to build a corpus over time and ensure financial security for your loved ones' future when you won't be around. You can choose to receive either lump sum amount or monthly income as payouts.
In the quest between investment plan vs savings, a savings plan is a much-needed solution that many people need to fulfill various life goals. With regular savings for a specific tenure, you can create wealth and build the financial backing for your goals or that of your loved ones. In case something unexpected happens to you during the plan tenure, the plan will protect your family's financial needs, allowing them to live a worry-free life after you.
At Max Life Insurance, we offer several savings plans which you can choose from as per your goals and needs.
What are Investment Plans?
These are financial products that enable you to invest money to create wealth for future needs. Through various investment plans, you can make systematic, regular investments into several funds based on the appetite for handling risks. You can easily find investment plans that also include the insurance or life cover element to secure the future of your family. ULIP (Unit Linked Insurance Plans) is a good example.
In the debate about savings vs investment plans, ULIPs win the game over the return aspect and many other features. These investment plans allow you to follow a flexible approach to investing money in different funds to balance investment components. You will get market-linked returns on the money you put into these investment plans, along with the opportunity to save tax.
Also Read: How to Save Income Tax?
Max Life Insurance offers several ULIP plan variants to meet the diverse needs of investors. Make sure you understand how these plans work before you invest in them as a part of financial planning.
In the debate about savings vs investment plans, ULIPs win the game over the return aspect and many other features. These investment plans allow you to follow a flexible approach to investing money in different funds to balance investment components. You will get market-linked returns on the money you put into these investment plans, along with the opportunity to save tax.
Also Read: How to Save Income Tax?
Max Life Insurance offers several ULIP plan variants to meet the diverse needs of investors. Make sure you understand how these plans work before you invest in them as a part of financial planning.
How Much Should You Save or Invest?
Any single answer cannot justify various questions related to savings vs investment plans that people ask. However, you can keep in mind the following two basic principles to understand the difference between savings and investment plan better –
1. Keep enough savings aside to cover your personal expenses like insurance premiums, loan EMIs, or any emergency.
2. Long-term goals that require a big amount in say, ten to fifteen years should be investment-driven. For instance, if you want to buy a new home ten years from now, you need to choose an investment plan to fulfil this objective. You can also get an estimate using an investment calculator
You need to consider several factors to arrive at the definite amount that you should save and invest.
1. Write Down Your Goals
Before you choose between an investment plan vs savings, it is crucial to define the goals first. The primary goal to save money is to keep the value of your capital intact and making it available for everyday needs. So, make a list of expenses that can be covered through savings.
Next to knowing the difference between savings and investment plan, if you go with investing, look at long-term goals. Various investment instruments allow your capital to grow as per the risk involved. So, set goals like a child's education goal or your retirement plan. Keeping a long timeframe with investment plans is highly recommended to balance the impact of ups and downs in the market conditions.
2. Assess Your Income
A crucial task while analyzing the difference between investment and savings is to consider your income. For every individual, a major part of the regular earnings goes into meeting the family's various financial responsibilities. Whether it is household needs, kids' education, or existing loan EMIs, there are several aspects for which you require a certain amount. What is left after meeting all these expenses can be saved or invested.
Irrespective of how much you earn every month, saving or investing goals require you to come up with a definite amount.
2. Assess Your Income
A crucial task while analyzing the difference between investment and savings is to consider your income. For every individual, a major part of the regular earnings goes into meeting the family's various financial responsibilities. Whether it is household needs, kids' education, or existing loan EMIs, there are several aspects for which you require a certain amount. What is left after meeting all these expenses can be saved or invested.
Irrespective of how much you earn every month, saving or investing goals require you to come up with a definite amount.
Frequently Asked Questions (FAQs)
Q. Why is knowing the difference between savings and investment plan essential?
A. Adequate knowledge about savings vs investment plans will make it easier for you to choose a path that is suitable for your needs. As a whole, it can make a significant difference in your financial plan for life.
Q. Why shouldn't I save money for my long-term goals?
A. When you save money, the lack of risk involved reduces the potential capital appreciation that can happen with investing the same amount. Since you have enough time to achieve such a goal, you can benefit from the power of compounding by investing money in the right instruments.
Power of Compounding Calculator
Q. Should I only consider returns while choosing savings vs investment plans?
A. Other than returns, it is important to consider your income, needs, and risk-appetite before you make an informed decision to choose between an investment plan and savings.
Q. Can I get the benefits of investments and insurance with one instrument?
A. You can plan to invest in ULIP, which offers dual benefits of good returns over the invested amount and life insurance coverage.
Q. Is it good to choose savings or investment plans based on peer recommendations?
A. Peer recommendations can give you an idea of what works for them and how they have chosen any such plan. Still, it is crucial to thoroughly look at your needs and understand the difference between savings and investment plans.
Sources:
https://www.sec.gov/rss/ask_investor_ed/saveinvest.htm
ARN No: Oct21/Bg/04A
