Saving and investing money both make up a huge part of financial planning. Both strategies offer resolute financial security for the future. Yet there are some major differences between the two. While savings offers a safe enclosure for immediate monetary needs, investment is a process of increasing the existing wealth. Therefore what are the pros and cons of savings and investment? And which one should you choose? Let's find out.

What is Saving?

Savings is typically the act of storing away the money. It offers a safety net for sudden or immediate needs. Banks offer long term fixed deposits and short-term savings account as per the need of the client. Depending on your need, you can start saving on a long-term and/or short-term basis.

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From another perspective, savings are associated with low risk and low return. The cash is readily available at hand but the growth opportunity is very low.

Pros of Savings

Access and Availability

Nowadays, it is quite easy to open a savings account. You have 24/7 access to your deposited money through ATM or debit card. In addition to that, you can also transfer funds from one account to another instantly.

Security

In Bangladesh, the savings accounts can be opened in Bangladesh Bank authorized banks only. As per the regulation of the constitution, Bangladesh Bank acts as the superintendent of all the existing government and private banks of the country. Due to high regulatory monitoring, your money is safe and secured beyond any reasonable doubt.

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Accrue Interest

A savings account accrues interest over your deposited money. The interest rate differs from bank to bank and it also depends on the amount of money deposited. There is also the factor of the type of deposition. For example, a fixed deposit will accrue more interest compared to a current savings account. However, the rate, in general, is quite low so you shouldn’t be expecting much to be added to your savings.

No lock-in period

Unless you are opting for the fixed deposit scheme, there is no lock-in period with your account. That is you can switch your account status as well as the minimum amount any time you want. This allows an added flexibility which can be useful in the long run.

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Cons of Savings

Inflation

The economy is susceptible to inflation. The worth of money 10 years ago grossly differs from the worth it has today. So if your bank is not providing you with a competitive interest rate, the savings might be subjected to inflation. That is to say, the worth of your deposit right now might be less in a year.

Minimum balance requirement

Most banks have a provision for minimum balance requirements. You need to maintain a threshold amount all year round. This can be problematic if you are saving a little. However, the threshold amount is very low in the case of current savings. But it can go up if you opt for a fixed deposit scheme.

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What is Investment?

Investing is the process of using your money in a venture that will provide a high return. The main difference between savings and investment is the level of risk involved. While saving is a low-risk strategy, investment has a risk associated with its high return. The typical investment strategies include investing in startups, bonds, and stocks. With the right strategy, you can earn a lot from investment and use it as a means to increase your wealth.

Pros of Investing

Additional Income

The return from investments is much higher compared to the interest gained through savings. Depending on the extent of your investment, you can expect a hefty return which might add to your income source. Many even use their investment strategy as the sole income source.

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Outperform the Inflation

In the savings part, we discussed how inflation might cause your savings to get devalued. If there is no competitive return on the savings, the amount stays the same and over the year, it loses its initial value. However, the return on investment is very high. And as a result, you can easily outperform inflation by increasing the initial amount.

Perpetual returns

Some investments allow for perpetual return. That is, you can continue to get a return from your investment. This is a perfect opportunity for those with the spare amount to invest. There is a specific type of bond called perpetual bond which allows a continuous return on investment.

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Flexibility

In traditional investment strategies like bonds, stocks, and equities, there is no threshold for investment. You can invest as much as you want. It can be a bare minimum or a large sum. The return will be proportionate to your investment.

Cons of Investing

High Risk

Just like there is a high return on investment, the risk is high too. While there is virtually no risk in savings, you stand to lose a lot in investment. Sometimes the amount can be as high as your entire investment.

Time-consuming

Depending on your investment strategy, it might take a long to gain the profit margin. In addition to that, there is also the scope for other costs – like brokerage cost, accidental cost, etc – which might reduce the profit margin significantly.

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Savings vs Investing - which one is better?

Saving and investment are both equally important and one cannot be emphasized over the other. Both are an integral part of financial security and increment of wealth. If you are someone looking for a financial cushion to support you after retirement or for an emergency need, savings is the right option for you.

But if you are someone who has sufficient funds for an emergency and is looking to grow your wealth, you should definitely consider investment strategies. Overall, both are important to ensure financial growth and stability.

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Bottom Line

To sum things up, you need both savings and investment strategies in your financial planning. However, you should have some savings as your emergency net before jumping onto investments. Savings and investments go hand in hand as you can use the increased wealth from investment in saving schemes.