However hard one may try, complexity is what he finds when seeking for the precise relationship between saving and investment.
And, this obviously is the reason why there are differences of judgment as to what is a satisfactory national saving rate.
Therefore, in order to unravel the elements of the puzzle, and to bring clarification to the subject at hand, we shall begin with delving separately into each of them.
With this in mind, we begin first with saving.
What is saving?
Saving can simply be defined as an income not spent. Also, it can be referred to as a deferred consumption. And correspondingly, saving also involves reducing expenditures, such as recurring costs.
When talking about saving, it is important to realize that here are various examples of savings, and they include: putting money into a deposit account, a pension investments, an investment mutual fund, or as cash.
For the purpose of bringing correction to a misunderstood concept, it should be made known that saving differs from savings.’ The former refers to the act of increasing one's assets, and the latter refers to one part of one's assets, usual deposits in savings accounts. To make it more simple, savings is the end result of saving.
What is investment?
Investment is basically the allocation of money or other resources, such as time, with regards to the expectation of some benefit in the future.
Also, Investment generally results in acquiring an asset, also called an investment. If the asset is available at a price worth investing, it is normally expected either to generate income or to appreciate in value, so that it can be sold at a higher price (or both).
In finance, the benefit from an investment is called a return. The return may consist of capital gain or investment income, including dividends, interest, rental income etc., or a combination of the two.
What are the differences between saving and investment?
Saving: Basically, saving is typically for smaller and shorter-term goals in the near future. This is usually three years or less. Examples of such goals are going on vacation, having money for an emergency, buy a car, e.t.c
The act of investing can help you reach bigger long-term goals. And sometimes, this usually takes at least four to five years away.
The account which is created for the purpose of saving gives you access to ready cash whenever you need it.
Logically, the power over your money or resources is denied you the moment you take side with investment.
It is correct to affirm that your money is at minimal or no risk when it is in a savings account. And this is because there is enough capital to effectively run the savings activities that go on in the bank.
There is every possibility that you may lose some or all of the money you invest.
When you save, you earn interest. But it should be highlighted here that savings accounts generally earn a lower return than investments.
Investments have the potential for higher return than a regular savings account. Your investments may appreciate (go up in value) over time. This increases your net worth, which is the value of your assets (what you own) minus your liabilities (what you owe). If you sell for a higher price than you invested initially, you make a profit.
What are the relationships between saving and investment?
One relationship between saving and investment is that the sole purpose of them is for the benefit of the future.
Also, another relationship between saving and investment is that the income meant for them are outside the league of expenditure.
In conclusion, it becomes acceptable to affirm that upon definition, analysis and comparison, the discrepancies between saving and investment are much more that their relatedness.
The author is head of Money Mantra, a Mumbai-based financial advisory firm. Views are personal