Investment and savings are usually used interchangeably because of their similar end goal. They are useful tools for financial security in future. The two are however completely different financial actions. Savings will involve laying away part of your disposable income for use in future. This can be carried out at home or through one of many different savings accounts. Savings usually covers unexpected emergencies and large expenses such as college education expenses.
On the other hand, investment refers to money that has been committed to a risky opportunity for future appreciation of value or generation of income. Investment will require a capital, cash or savings outlay on an asset or opportunity that will result in some form of financial growth. Investment can range from jewelry, bonds, stocks, real estate and other similar ventures. Any item that has the potential to grow in value may be considered an investment. The two main types of investment are variable income and fixed income investments. Variable income investment ventures will have fluctuating interest rates, as opposed to the fixed alternative rates.
There are usually different intentions for the funds under both savings and investments. Savings are usually set aside to target minimal financial goals. They are usually set with a single target in mind, which may be carried out over a short period of time. This is usually between a few months and five years. The targets include financing education and buying personal effects. The short term and flexible nature of savings makes them ideal for short term financial goals. On the other hand, investments are designed for long term financial goals. Investments involve a long term project with typically substantial outlays. Some investments include buying a home and starting up a business.
Investments offer limited access to withdrawal when compared to savings. Savings will be useful in case of financial emergencies, especially when they are in money form. You control your savings account, which means that you can withdraw part or the entire amount on demand. Investments are more limited in terms of access. Even the most flexible types of investments will require some time before all of your money is available and accessible to you. There are a few types of investment, such as mutual funds, which allow complete access to your funds at all times.
Investments will attract higher risk than savings. If you save your money with a bank, the risk of losing it is almost nonexistent. Even if you save your money at home, you will not face significant risk if you take measures to protect your savings. In the bank, your savings could even gain interest. Investments will attract risk even if they offer potential rewards. Each type of investment will attract a unique type of risk.
Investments have a better long term potential for returns. Savings could gain interest over time, but this is limited compared to the potential that investments offer. Combining interests and savings for their complimentary characteristics could help you secure your finances. Savings will offer cover for you in the short term and provide some stability while investments could help you gain return and secure your long term financial future.