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Are savings and investments inter-related to each other ?

Savings and investments are both vital components of a healthy financial planning; since both are mutually connected to each other. Through saving money, one’s money is kept safe and easy to access for necessity; on the other hand, by investing early over time, one’s money grows in value, benefitting from the magic of compounding. Savings provide a safety net and a way to achieve short-term goals, while investing has the potential for a higher long-term returns and can help to achieve long-term financial goals – thus, comparatively, investment has the potential to generate much higher returns than savings accounts. If anyone is saving up for a short-term goal and will need to withdraw the funds in the near future then you are probably better off parking the money in a savings account. Conversely, if any person’s goals are longer in duration, then the person can easily obtain more satisfactory result through investments.

The most important reason for saving is known as ‘precautionary motive’ – perhaps more commonly known as ‘Saving for a rainy day’. This involves building up funds to provide unexpected events and bills. If anyone does not have any savings and an unexpected event occurs with financial consequences, such as car being damaged or someone becoming too ill to work and losing their income, then there are only three alternatives :

1)     1) Receiving a payout from any insurance taken out against such an unexpected event.

2)      2)Borrowing money from family, friends or financial institutions to pay the unexpected bills.

3)      3)Defaulting on any commitments, for example not making payments on a car-loan or a mortgage, with the consequent risk of repossession and negative impact on future credit ratings. Having funds, set aside in investments is an important means of preparing for unexpected life-events – the savings act as a buffer to protect a household against other possibilities.

The second reason for which savings is important for investment is for a specific purpose. One can put a certain amount aside each month (or week), based on a calculation of how much one needs for a particular goal. One of the most significant purpose of saving is for retirement, but investing can also be for many other reasons, for instance, saving for a child’s education, sending money abroad to family or paying the costs of a nursing home for a parent.

The third reason for investing could be to accumulate wealth for which, as yet, there is no defined purpose. The savings may later be spent on a variety of things, for example, a second home, a series of holidays after retirement or leaving an inheritance to children.

The above mentioned reasons all underline an important overall aim of having investments – to give a sense of independence and autonomy to do things. Having sufficient funds in your investments could enable you to control any untowards situation. It could also enable a person to take advantage of opportunities that arise (such as being able to pay for education or to start a business).

Since, both savings and investments have its own pros and cons, it is important to find the right balance that works for financial situations and goals. However, a well-rounded approach that includes both savings and investments can help to build wealth, protect against financial shocks and provide a solid foundation for a more secure financial future.