The one BIG question which pops up every time people talk about money. Most people confuse between savings and investment even at times interchanging these two terms, which pose risk as far as your financial planning is concerned.
The money you earn is your income. From this income the money you set aside to full fill some goals is Savings. Let us see some of these goals
- emergency expenses
- insurance premiums
- that much waited vacation
- that gadget you were dying to get your hand on
Now one things is common for all these goals is, you will need fixed amount within specific timeframe to full fill them. The timeframe is urgent (for emergency expense) or several months to an year. These are goals short term goals.
There is subtle difference between Savings and Investing. Investment is nothing but savings targeted towards a growth oriented goal.
- downpayment towards your dream home
- for that peaceful retirement
- wealth creation
For all these goals, you don't need money immediately or in short time. These are long term goals ranging from 2-3 years to 25-30 years.
How much to save?
So the important question, how much one should save?
The spend and think equation. This is how most people do savings.
⇒ Income - Spend = Savings
but this simple looking equation runs risk of non planned expenses, procrastination for saving resulting in taking hit in achieving your financial goals.
Now look at below equation,
⇒ Income - Savings = Spend
This equation with just one parameter changing its place, works wonders. This will force you to keep check on your expenses. This will lead to think before you spend habit.
Hope to have cleared some confusion, do let me know by commenting on the post. There may be still doubts, which shall get cleared when I touch upon various avenues and instruments of savings and investments in next post.
