A lot of people fail to understand the difference between savings and investments and often use these terms interchangeably. While both are equally important, their purpose differs. Risk and liquidity are the key words that distinguish the two terms. Savings are short term funds which are liquid in nature and can be withdrawn easily to achieve your short-term goals. Investments, on the other hand, are long-term funds intended for wealth accumulation that offer high returns but are difficult to withdraw. The purpose of investments is to achieve long-term objectives like the education of a child, their marriage, building a house, and planning for retirement, among others. Let’s look at an example:
Shruti and Alok, who have been together for four years, have a 1-year-old son named Shlok. They are a married couple who have been working for the past three years and still have 17 years to pay off their home loan. As and when they manage some savings, they open a fixed deposit account as they believe it’s the safest and quickest way to access their funds, especially during an emergency.
It’s good to have control over your savings with the flexibility of using it as you wish; however, it’s not the best formula if you want to build a corpus for your future.
Let’s list down some key financial goals that Shruti and Alok should aim for:
Pre-Closure of Home Loan – Instead of paying their loan for the next 17 years, wouldn’t it be great if they can wrap up their debt within the next 10 years or so.
Education of child – considering the rising inflation rate and increasing cost of education, the parents definitely need to build a corpus for Shlok’s education.
Retirement – With increasing life expectancy rate, the post-retirement period has become an important phase for which you need to save.
A Fixed Deposit earns an annual interest rate that is lower than the rate of inflation for education and healthcare, which is approximately 7-10%. So, are their savings really multiplying?
There are a lot of investments options today such as Mutual Funds, Stocks, etc. but the advantage of insurance is that it offers a dual combination of life protection and investments.
Practically, Shruti and Alok should start investing in a Child plan and Retirement plan which will allow them to have investments specific to their goals. The next step should be to consult an expert, like an insurance broker, who will be in a better position to evaluate Alok’s requirements and recommend the best plans.