AN INDIVIDUAL'S income is either consumed or not consumed. The portion of one's income that is not consumed can be either saved or invested. The decision to save or invest really is a decision to defer consumption now in order to increase consumption later. While saving and investing are used interchangeably they are quite different.
Why does one save? Individuals save for a number of reasons. Savings act as a means of providing funds for a time of emergency. Individuals save in order to meet various needs, which may be short term in nature such as upcoming expenses, e.g. rent. Savings by itself does not allow an individual to create wealth. If you save cash under your mattress, all you have is what you have put away. Similarly holding your savings in a savings account hardly brings any return above what you have put in the account, since the interest rate on deposits is usually very low. Savings conceptually carries very little risk unless the financial institution, with which you are saving, experiences a financial crisis. The risk here is low in a well-regulated financial sector.
Investing however takes savings and uses it to create wealth through a medium such as buying stocks or bonds for the purpose of profit and is characterised by sufficient research on the investment, and comfort that the odds of making a profit are favourable. Investing is usually done on an ongoing basis as part of a long-term plan to realise higher returns.
INFLATION
Savings accounts at a bank will pay interest on savings that does not usually provide returns, which compensate individuals for inflation. Therefore, while a savings account allows one to store money safely, it is a poor medium through which to increase value, as inflation over the long-term outpaces the return on your savings.
While investing in stocks and bonds can result in a decline in the value of your investment from time to time over the long run, they have consistently returned enough to outpace inflation.
CONSUMPTION TODAY
OR TOMORROW?
Savings can be a far more liquid way of keeping income not consumed through savings accounts or money market accounts. One can therefore easily access funds through ATMs or going to the bank for withdrawals. The accessibility of savings usually influences individuals who are susceptible to overspending to be undisciplined in their approach to deferring consumption today.
Investing provides a less liquid form of investment as most investments in stocks and bonds first require finding a buyer at a price that you are willing to sell your security. Other forms of investment such as Mutual Funds which is a pooled investment with other individuals locks the investor in for a period of time, and therefore the individual would not be able to obtain funds from that investment until the period has elapsed.
A good example of the distinction between savings and investing is pension. Pension is withdrawn from an individual's salary before the individual receives their salary for the month. That pension is savings that will be used by the company's pension fund to invest in a combination of investments such as bonds, stocks, repos with the aim of maximising your pension outlay at retirement.
Savings is therefore the act of deferring present consumption while investing is the act of using savings to invest in securities, which carry different levels of risk with the hope of increasing future consumption.
