Whether you have just started a new job at an MNC or you’ve just received some money from your family, you might be wondering how to build a secure financial plan. Both savings and investment options can help, but you need to choose between them to understand their differences.
But there’s a misconception among a lot of people that savings and investment are the same thing. However, it is not true! These two instruments serve different purposes to secure your financial future. It’s important to understand the difference between a savings plan and an investment plan early in life.
In this post, we’ll dive deeper into the difference between savings and investment plans.
What is a Savings Plan?
To put it simply, a savings plan is a type of life insurance product designed to help individuals accumulate wealth over time through disciplined savings. These plans offer designated returns which make them a reliable way to grow your financial resources steadily. The main objective of a savings plan is to enable you to build a substantial corpus that can provide financial security for your loved ones in the future, especially in situations where you may no longer be there to support them,
What are the benefits of a savings plan?
Let’s take a look at the potential benefits of a savings plan.
- Safety & Liquidity
One of the biggest benefits of having a savings plan is that it provides a secure way to store money, ensuring your funds are readily available when you need them. Some of the common examples of savings plans are traditional savings accounts or certificates of deposit.
- Low Returns
While savings plans offer safety and security, the returns are usually normal. Remember that interest rates on these accounts are generally low, and they are designed to protect your capital rather than deliver substantial growth. Furthermore, this makes savings plans ideal for preserving wealth, but they might be the “best” option for someone looking to generate maximum returns.
- Short-term Focus
Another major highlight of savings plans is that they are particularly suited for short-term financial goals. Whether you’re building an emergency fund, preparing for unexpected costs, or saving for an upcoming expense like a vacation or a down payment on a house, savings plans offer a reliable way to ensure that your money is available when you need it.
What is an Investment Plan?
In layman’s language, an investment plan is a financial strategy that helps you grow your wealth to meet your upcoming financial objectives. All you need to do is make regular contributions to different investment options, and then you can build a strong foundation based on your risk tolerance. Some investment plans even offer the added benefit of insurance, which ensures your family’s financial security in your absence.
One popular investment plan is a ULIP, which combines investments and insurance. When comparing savings and investment plans, ULIPs often stand out because of their potential for higher returns and flexibility. Furthermore, they allow you to invest in a multitude of funds, which may balance your investment portfolio and provide market-linked returns.
What are the advantages of investment plans?
Here is a list of the advantages of investment plans.
- Potential for Higher Returns
One of the major advantages of investment plans is that they offer the opportunity to earn higher returns compared to traditional savings accounts or bonds. When you invest in stocks, mutual funds, or real estate, you can potentially grow your wealth significantly, especially over the long term.
- Achieve Long-term Financial Goals
One of the highlighting aspects of investment plans is that they can help you reach long-term financial objectives. Whether you’re saving for retirement, your children’s education, or a major purchase, investments can help you build the wealth needed to achieve these goals. Furthermore, when you invest, it automatically contributes to economic growth by fostering innovation, capital to businesses, creating jobs, and driving overall development.
- Diversification for Risk Reduction
Another major aspect of investment plans is that they enable you to diversify your portfolio across multiple assets. With such diversification, you can ultimately reduce risk by minimising the impact of any single investment’s poor performance, which may make your overall financial strategy more stable and efficient.
Savings Vs Investment Plans
Based on various parameters, let’s examine the differences between savings plans and investment plans.
| Parameters | Savings Plans | Investment Plans |
| Purpose | Savings plans are generally designed for short-term financial goals such as building an emergency fund. | Investment plans, on the other hand, are designed for long-term financial goals. |
| Risk | Speaking of savings plans, these plans are usually associated with low risk because they are placed in secure accounts like savings accounts. | Conversely, investment plans come with a range of risks, depending on the assets you choose to invest in. |
| Return | The return on savings plans is relatively lower than that on investment plans because savings plans prioritize the safety of your principal amount overgrowth. | In comparison, investment plans have the potential to offer higher returns, especially over the long term. |
| Liquidity | Savings plans offer higher liquidity, which means you can easily access your cash whenever needed without facing any delay. | On the flip side, investment plans are less liquid. It may take more than a few days to fetch the amount. |
| Time Horizon | Savings plans are best suited for short-term goals, usually within 1 to 5 years. | On the flip side, investment plans are designed for long-term time horizons, for 10 years or more. |
| Examples | Some of the common examples of savings plans may include savings accounts, CDs, and money market accounts. | On the other hand, examples of investment plans may include stocks, bonds, mutual funds, and real estate. |
How Much Should You Save or Invest?
If you are unsure how much you need to save or invest to secure your financial future, keep these points in mind.
- Define your Goals
One of the major aspects to keep in mind before you know how much you need to save or invest is that you should know your goals and have a strategy to achieve them. When it comes to short-term goals, like building an emergency fund, then choose a low-risk savings plan. On the other hand, if you have long-term financial goals, such as saving for a child’s education, you need to consider an investment plan.
- Don’t Forget to Evaluate your Income
Another major aspect to consider is that you need to consider your current income and regular expenses such as EMIs, rent, and utility bills. Furthermore, you might need to stick to the 50/30/20 rule. For example, you need to allocate 50% of your income to essential expenses, 30% of the things you want, and the remaining 20% to savings or investments.
Frequently Asked Questions
Listed below are the frequently asked questions related to savings and investment plans.
No, it’s important to also consider your income, needs, and risk tolerance before choosing between a savings and investment plan.
Yes, you can consider a ULIP, which provides the dual benefits of investment returns and life insurance coverage.
While recommendations by peers or friends can offer insights into what works for others, it’s crucial to evaluate your own needs and understand the difference between savings and investment plans before making a decision.
There’s no perfect answer to the question. Remember to evaluate your financial goals, risk tolerance, time frame, and liquidity needs to determine the perfect balance between savings and investments.
There are multiple reasons behind it. Remember that investing requires knowledge, patience, and discipline. People often fail because they lack one or more of these qualities. If you want to succeed in the world of investing, it’s important to educate yourself, set realistic goals, and make the best decision.
