We will discuss the difference between Saving and Investing

Before we talk about Savings, we need to understand “Consumption”. In General economics Income = Consumption + Savings. So what is left after consumption is called savings.

Consumption is what you require to live — food, clothing, shelter, transportation, communication etc. For a poor person, consumption will be the major portion of his income. Most likely, his consumption will be higher than his income — hence he borrows money to meet the consumption demand.

The excess from the income that is not consumed is called savings. Savings mean park the money in a highly liquid emergency fund. Ideally, the savings should be able to meet 6 months of consumption demand if the income = 0 (job loss, loss of business, accident, temporary disability etc).

Investing on the other hand means buying assets to get an additional source of income — rentals, dividends, or capital appreciation. Investing also means your capital may remain illiquid for a while.

If you look at the early 1900s, the economist always segregated savings and investments. These days the demarcation rarely exists as more people can invest & save at the same time using Mutual funds.

There is a catch though, the fundamentals of investing have not changed. An asset will yield returns only when it matures, even if you invest in a mutual fund — the returns will start only when the goal of the fund is met. If you redeem it earlier thinking it is a savings fund, you may lose capital too.