There are synonyms and antonyms in language. However, “saving” and “investing” are neither. The two terms are related financial concepts in that they deal with what we do with our money. While they are often used interchangeably, they each have separate meanings. Most people would have to save money before they invest and this is probably why the terms may get confused.
The most fundamental difference between saving and investing is the financial objective. Saving is protection oriented (merely putting money aside) while investing is growth oriented (seeks capital gain or returns that outweigh inflationary effects). Even if you are getting a fair return on your savings, this does not make it an investment. There are some other notable differences between the two terms.
Risk/ return trade-off
The difference between saving and investing can be pinned down to the level of risk. Savings would generally involve low-to-moderate risk with low-to-moderate returns. Savings funds may also be insured or guaranteed to a greater or lesser extent. Investing involves higher risk with potentially higher returns.
Investment period
Saving is generally designed to meet short and medium-term financial goals while investing occupies a wider investment horizon. This does not suggest that investments cannot be used for the short term or that savings cannot be used for the long-term. However, it is not often appropriate or practical to do so.
Asset classes
The type of fund used can make the difference between saving and investing. You could decide that you just want to save your money. However, if you use a growth option, then you are not saving (as you intended), but investing. Cash options are associated with saving, while growth options are associated with investing. Income options fall between the two and can be considered as a saving or investment based on the nature of the option or your objective.
Liquidity
You would typically have easier access to your money when you save as opposed to invest. The higher liquidity associated with saving suggests that you can readily convert your savings to cash. There’s still some liquidity with investment (you can sell some stocks at anytime for e.g.). However, investment bears some degree of liquidity risk (unlike savings). Liquidity risk refers to the inability to convert your investment to cash when needed for various reasons.
The difference between saving and investing is important in understanding how to undertake portfolio diversification. It can also be useful in detecting poor-quality financial advisors who think it’s just a matter of semantics. Basically, knowing how to distinguish between saving and investing can help you to construct a formidable financial plan.