Savings vs Investing: Differences and When To Choose

In our previous discussion, we delved into the concepts of the Time Value of Money and Compounding Effect, shedding light on why immediate funds often outweigh their future equivalents and how your investments can multiply over time.

Now, let’s dive into something just as important: why it's crucial to invest.

Many promote the idea of saving money for rainy days, but here's taking it a step ahead: ‘Invest because saving isn't enough. But aren’t savings and investments the same thing? Nope, not really. 

By the time we wrap up this chapter, you'll have a clear picture of different ways to save and the vital importance of investing. You’ll learn about the right time and methods for planning your investments.

Let's begin this discussion by talking about savings.

What are Savings?

Think of saving money like little drops in the ocean. You start with a little, and gradually, it accumulates into something substantial. Savings are the funds you keep aside for future needs or goals. They're like your financial safety net, there to catch you if you ever need it.

Understanding Savings Goals

When we chat about setting savings goals, we're really talking about plotting points on your financial journey. Each goal you set is like a signpost marking your progress towards a more stable and flourishing financial life.

Breaking Down Savings Goals

When you're thinking about where to put your savings, it's almost like planning different adventures or projects. Some things you want to do or buy soon – like maybe getting the latest smartphone or going on a weekend trip. These are your near-term targets, which you're excited to check off your list soon.

Apart from these, you have big dreams that you’re working towards – maybe over a longer stretch of time. It might be about ensuring that you've got a solid fund for when your kid heads off to college, or maybe it's about building up a cosy nest egg for when you retire. These aren't just plans; they're more like your major life chapters waiting to unfold.

Now, think about how you sort out these plans. First, you've got your just-in-case stash, your emergency fund. It's like your backup plan for those unexpected moments. Then, you've got those short-range goals – they're closer and feel more immediate. Later come your long-haul goals - they're like the landmarks in the distance, guiding your journey.

Here's the catch with planning, though – life's full of twists and turns. So, your savings plan has to be ready to roll with the punches. Goals change, and that's perfectly fine. It's all about being ready to shuffle things around when needed, keeping your plan as alive and dynamic as life itself.

Now, let’s look at how to calculate the required savings roughly. 

How to Calculate Savings?

Here’s a friendly way to approach this seemingly daunting question of calculating the required savings: 

• To begin with, think about what it is that you’re trying to save up for. Is it something urgent like an emergency fund? Something relaxing like a vacation? Or something recurring? 
• Once you have the answer to the previous question, the next step is to work out how much money you’d require to actually achieve those goals. 
• When you’ve arrived at an approximation of the amount of money you require, start by breaking down that savings goal into smaller, manageable subgoals – by taking it month-by-month. 
• Simple maths follows. If you want to figure out how much you should be saving monthly, divide your total goal amount by the months you have until your deadline. For instance, for a ₹4,00,000 goal in 4 years (48 months), you'd need to save about ₹8,333 monthly.

One thing to note in all of these calculations is that your savings account earns interest (provided you ‘save’ in your bank account). This can have an impact on the calculations you did. For best results, a savings calculator can be a handy tool to add interest to your monthly savings plan.

Choosing the Right Savings Account

Selecting an appropriate savings account is vital for optimising your financial growth. Here are key considerations:

• Higher interest rates
• More accessibility of funds
• Limited fees and restrictions 
• Additional features for your use case 

Let's examine two hypothetical savings accounts for comparison:

• Account A provides a 4.5% interest rate with no monthly charges but requires a minimum balance of ₹5,000.
• Account B offers a 6% interest rate; however, it includes a monthly maintenance fee of ₹50 and has a restriction on the number of withdrawals.

If your goal is to keep a significant balance without needing regular access, Account A could be more suitable. On the other hand, if you prefer a higher interest rate and can handle the fees, Account B may be a wiser option.

Crafting Your Savings Blueprint

It’s extremely crucial to have a clear savings plan. Don't confuse clarity with rigidity. You can be flexible, and your savings plan needs to be too! But a clear plan will act as a map and guide you through your financial choices and will help you track your progress towards the different financial goals you set more efficiently.

Wondering how to create this blueprint? Here's a sample table that you can use in order to organise your savings plans effectively:

Detailed Savings Plan Structure

Goal Type	Specific Goal	Amount Needed	Time Horizon (Years)	Monthly Savings Required	Interest Rate (Expected)	Total Amount after Time Horizon
Emergency Fund	6 Months' Expenses	₹3,00,000	1	₹25,000	3%	₹3,06,000
Short-term	Vacation	₹1,00,000	2	₹4,166	3.5%	₹1,02,000
Medium-term	Down Payment for Car	₹5,00,000	5	₹8,333	4%	₹5,20,000
Long-term	Child's Education	₹2,000,000	10	₹16,666	6%	₹2,200,000
Retirement	Comfortable Retirement	₹10,000,000	20	₹41,666	7%	₹12,000,000

*Data in this table is only for illustrative purposes and is not to be taken at face value.

This table is a roadmap for your financial journey, helping you visualise and strategise your savings according to various life goals. The monthly savings required are calculated to meet the specific amounts needed, considering a conservative estimate of the interest rate. Remember, the key to achieving these goals is consistency and timely reassessment to align with any changes in your financial situation or goals.

At the beginning of this chapter, we said to invest because saving isn't enough. Let's delve into investments next to help you see the difference they can make in your life.

What is Investing?

Investing is a bit like growing your garden. Imagine you've already bought the seeds with your savings. Now, what's the next step? Planting seeds, right? That's what investing is.

Investing is essentially all about putting your money to work in different places – pretty much like how you plant different kinds of seeds throughout your garden. Each one of the seeds/investments has the potential to sprout and grow. 

Here's a simple example: Assume you invest ₹20,000 in a stock. In about a year, the value of the stock rises by 20%. Your investment is now worth ₹24,000. That extra ₹4,000 you made is the reward for your smart choice to invest.

Here’s a table to illustrate different types of investments with examples:

Investment Type	Example	How Does It Work?	Risk Level
Stocks	Buying shares of Reliance.	You benefit from the company’s growth and face losses with the company’s losses.	High
Bonds	Investing in government bonds	You get fixed interest payments according to what you lend the issuer.	Low to Medium
Mutual Funds	Buying a Nifty 500 Fund	By pooling your money with other different investors, you will be able to have a highly diversified portfolio of stocks and bonds.	Medium
Real Estate	Purchasing an apartment for rent	You own property and earn through rent or property value appreciation.	Medium to High
Commodities	Investing in gold	Direct investment in physical assets like gold, silver, or oil.	High

Each investment type comes with its own risk and growth potential. Diversifying across different types can balance the risks and rewards. But why is investment important? Let’s look at that deeply in the next couple of sections! 

Why Should You Invest?

Before answering this question, let us discuss something hypothetical.

Let’s say you earn ₹6 lakh per annum. That translates to a monthly salary of ₹50,000. Assume that the total of your monthly dues is ₹30,000 for everything - from housing and health care to dining and entertainment. This leaves you with a balance of ₹20,000 per month.

Let’s ignore tax implications for the sake of easier calculations. 

Here are some assumptions that we’ll be working with: 

• You get a 10% salary hike every year. 
• You face an 8% hike in your cost of living every year.
• You’re currently 30 and looking to retire at 50. 
• You plan not to work post-retirement.
• Your expenses are consistent, with no unforeseen costs expected.
• The surplus ₹20,000 per month is kept as cash.

After 20 years, if we follow these assumptions, you would have saved roughly ₹1.7 crore (subject to factors such as inflation, investment returns and other financial considerations). However, this scenario highlights some alarming facts:

• Despite two decades of hard work, your lifestyle remains unchanged, potentially curbing your aspirations like a better home or travel.
• Post-retirement, with expenses still increasing at 8%, your savings of ₹1.7 crore might only last about 8 years.

Now, let's change things up a bit. Let’s add investments into this picture and see where it takes us. 

Now, imagine that instead of hoarding your monthly surplus, you invest it such that you enjoy an annual return of 12%. For instance, in the first year, your investment of ₹2,40,000 could grow to approximately ₹20,67,063 in 20 years.

Let's not dwell on the calculations for now, as they will be covered in detail later. The bottom line is, if you choose to invest, your financial picture changes drastically:

• By the end of 20 years, your cash balance could swell to an impressive ₹4.26 crore, a significant increase from the previous scenario.

So, then, why should one invest? Here are some compelling reasons:

• Fight inflation by combating the inevitable rise in various kinds of costs. 
• Create wealth and meet wider and larger financial goals. 
• Enjoy an overall better life without worrying about not meeting your financial dreams and aspirations. 

When to Invest? Things to Consider Before Investing

Deciding when to start investing is a lot like planning a big trip. You need to make sure everything is in place before you embark. But when should you embark? When is the so-called right time to invest? Let’s try to answer this question by looking at some important things: 

• Clear off all (at least the big ones) of your ongoing debts. 
• Always, ALWAYS, have emergency funds in place. 
• Be clear about your purpose of investing. What are the goals you’re seeking? Get clarity on this. 
• Learn to be calm through the ups and downs in the dynamic world of investing. Make sure that the thought of losing some money doesn’t make you want to jump up and around with anxiety. If that is the case, maybe wait before starting. 
• Try to maintain steady sources of income, as that makes it easier to put money regularly into investments. 

How to Invest with Angel One?

Investing in stocks through a brokerage platform like Angel One can be a straightforward process if you follow a few key steps. Here's a five-step guide to getting started:

• Register on Angel One's online platform and provide personal details and KYC documentation.

• Submit required documents for identity and address proof; wait for account verification.
• Link your bank account and transfer funds to your Angel One account.
• Utilise Angel One's tools and resources to analyse and select stocks aligning with your investment goals.
• Place buy orders for your chosen stocks and monitor your investments through the Angel One platform.

As you can see, we haven’t provided any definitive answer to “when to invest?” – because it doesn’t exist. Simply put, you should start your investment journey as soon as you can. It is never too early to begin and never too late, either! Just keep in mind that you are comfortable with the pointers we discussed above. 

Now, both saving and investing are to ensure financial safety. However, the shadow of ‘risk’ is persistently looming around. But then, remember, risk hain to ishq hain! What is this risk, exactly? How do we understand it? And why is it important? We'll explore these questions in our next chapter, diving deep into the concept of risk in finance.