Saving vs Investing Explained with Example
Scenarios of Saving vs Investing
In earlier article, we have seen what is difference between saving and investing. Let us compare the terms with the help of practical scenarios- Saving vs Investing Illustration, in this article.
Savings are usually put into the safest places or products that allow you to access your money at any time. Savings have almost zero risk of erosion and therefore the returns on savings are also extremely low. However, the term Investing is a disciplined and systematic approach to make your money work harder and compound into a larger corpus over a long period.
Saving vs Investing Illustration
Let us compare Saving and Investing with the help of numbers.
- The usual pattern is people save money in their savings account and then put it into FDs even for their long term goals. When they feel a sizable amount has accumulated into their savings account they do an FD which is again a savings instrument. Once FD is done, they start all over again.
- When they are looking forward to accumulate a sum in their savings account to make an FD, they simply miss to see the gains their money lying in their savings account could make.
- Also their money erodes if inflation is greater than the post-tax returns offered by savings account.
- Instead of just saving money regularly, they should invest in equity oriented funds regularly for their long term goals. For example, in Equity Linked Saving Schemes (ELSS) for the long term goals greater than 3 years, since ELSS funds have lock-in- period for 3 years. In ELSS funds, Long-Term Capital Gain (LTCG) is taxable @ 10% without indexation.
Saving vs Investing – Analysis of Returns
- From the above table you can see, same amount of money (Rs.6 Lacs) is being saved or invested in both the cases.
- But at the end of 6 years, the corpus difference is huge. It is around 1.53 lacs (3.13 Lacs – 1.6 Lacs). Returns with savings instruments is just Rs.1.6 Lacs in 6 yrs whereas through investing instruments (ELSS fund), it is 3.13 Lacs.
- Also, when your intension is to grow your money, you simply miss that. You have to pay taxes on interest earned through savings account and your FDs.
- Staying invested in equity mutual funds for more than a year invites Long-Term Capital Gains (LTCG) tax implications. LTCG Tax of 10% is applicable on gains exceeding Rs.1 Lac without Indexation benefit. Still, it serves as a better tool to build wealth over a longer period.
- Understand your investment need and choose an instrument accordingly.
- Go for saving instruments for short-term goals and use investing instruments for achieving long-term goals.