saving-vs-investment

Difference between savings and investment

Many times savings and investment are used as synonyms. However, although they are strongly related, they are actually very different. The difference between the two concepts, fundamentally, is the destination of money. The common point between the two is that we cannot have our money at that moment.

On the one hand, we call the money that we save so that we can dispose of it in the future. We give up spending it in the present, putting it in a safe and risk-free place, but one that 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 give us extra money. We associate investment with the purchase of a good or a financial asset, hoping to make a profit. This extra profit that the investment brings us with respect to the 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 a myriad of things, from something immaterial like education to financial assets like stocks, bonds or investment funds.

Therefore, the main difference between saving and investment is that with investment, instead of saving money, you give it up to give 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 making money, because we are giving up the extra money that we would have if we chose to invest. However, the return on investment is uncertain and in some cases there are risks of losing it.

With investment we must take into account three factors: risk, liquidity and time. All three factors are directly related to profitability. The greater the risk of losing the money invested, the higher the return we expect from that investment. On the other hand, long-term investments are more profitable because we give up more time making 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 when we want and with the investment, we have to wait to have our money but at the end of that period we will have more money than we had in the beginning, also, the investment carries some risk of loss of money.