Difference Between Saving and Investment
Savings and investment are often used interchangeably. However, although they are closely related, they are actually very different. The difference between the two concepts, fundamentally, is the destination of the money. The common point between both is that we cannot have our money at that moment.
On the one hand, we call savings that money that we save to be able to dispose of it in the future. We give up spending it in the present, putting it in a safe and risk-free place, but which usually generates interest. We are saving when we keep our money in cash, when we keep it in a bank account or when we keep it in a deposit , for example.
On the other hand, we call investment that money that we give up spending in the present so that in the future it will bring us extra money. We associate the investment with the purchase of a good or a financial asset , with the hope of obtaining a profit. This extra profit that investment brings us with respect to savings is due to the fact that with the investment we are risking our money, and for this we receive compensation. We can invest our money in endless things, from something immaterial like education to financial assets like stocks , bonds or mutual funds .
Therefore, the main difference between saving and investment is that with investment, instead of saving money, you give it up so that it gives you a return , that is, to take advantage of that money and increase its value.
Therefore, economically speaking, if we have a certain amount of money and we decide to save it instead of investing it, we are not earning money, because we are giving up extra money that we would have if we chose to invest. However, the return on investment is uncertain and in some cases there is a risk of losing it.
Profitability, risk and liquidity of savings and investment
With the investment we must take into account four factors: profitability, risk, liquidity and time. All three factors are directly related to profitability .
On the one hand, the greater the risk of losing the money invested, the greater the return we expect from that investment. That is why, while with savings we do not assume any risk, we can hardly expect profitability for the money that we have set aside. On the other hand, with the investment we accept a certain risk in exchange for a return on that money. The risk we assume with the investment will depend on the type of investment. There are investments with very little risk and others with a lot of risk.
On the other hand, long-term investments are usually more profitable because we give up more time to have it available to us.
To choose the best option we need to take into account our preferences. With savings we always have the same money but we have it whenever we want (it is very liquid ). On the other hand, with investment, we have to wait to be able to dispose of our money. In exchange for that loss of liquidity, once that period is over we will have more money than we had at the beginning, moreover.