Saving ≠ Investing

One of the key reasons, many Indian households fall short of their financial goals is on account of their lack of understanding of the difference between saving and investing.

This often-ignored difference between saving & investing has meant that the wealth-creation journey of Indian households has not reached its true potential. Indians have traditionally saved money in lockers, savings accounts/FDs, etc. but there is a need to let the money grow freely in wealth-creating instruments to overcome the destructive impact of INFLATION.

“The greatest long-term financial risk is not ‘loss of principal‘ but ‘erosion of purchasing power’ and inflation tends to erode the purchasing power of money over time.”

 

To begin with, savings and investments are not discrete subjects but are complementary to each other:

• Savings are a must for emergencies. one may lose a job; one may plan to start their own business or one may be hit by a medical emergency. In these circumstances, one needs liquidity and a liquidity backup to fall back upon. That is why it is always advisable to hold 5-6 months of monthly earnings as liquid savings.
• Secondly, the process of investing begins with savings. Let us first understand,

Savings = Earnings – Expenses

Savings is where the first step towards wealth creation begins.

• Whereas, investments bridge the gap between one’s dream and reality. Investments put money to work.

Look at the below table. An FD at 5% returns is able to multiply your wealth quite decently but if the returns are higher at 13% then the wealth is multiplied by many folds. That is the big difference that the power of compounding makes. So that is why investments are so critical to your long-term financial goals.

In our 32 years of experience, we have met a lot of people (including CAs and MBAs) who earn very well but they don’t invest, and there are a lot of people who don’t earn so well but who are very disciplined about their savings and investments. So, it’s more a matter of attitude and habit and one should inculcate the habit of investing as early as possible.