The difference between 'investment' and 'savings'

Often, we have heard of financial planners, advisers and also mutual funds peddle words like 'saving' and 'investment'. But did you know that savings and investment are two separate concepts?

Every month, most of us earn an income. This could either be in the form of our salary or business income. Then, we also have our expenses like food, clothing, rent, electricity and telephone bills, and so on. Once we pay off our expenses from our income, what's left is what we typically call, savings. Obviously, the more we save, the better. And we must always aim to curtail our expenses, but there are always some expenses we just can't avoid, like paying rent or a loan instalment. If the aim is to create wealth, then saving alone is not enough. We have to do something more with our savings.

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That's where investments come in. These are financial instruments that help us increase our money over a period of time. We need to invest because the cost of living goes up every year. It's called inflation. In other words, the value of money goes down. Say, you save Rs10,000 in present times, every month. If you leave this Rs10,000 as it is, it would buy fewer and fewer things as the years pass by. That's because money loses value over time, and prices of goods and services go up. That's why your money also needs to grow-and preferably at a pace faster than inflation-to be able to afford at least the same things that you could buy once upon a time. That's where an investment helps.

A mutual fund is a classic example of an investment. On offer are equity funds and debt funds. But remember, you need to ascertain how much risk you can take. There are investments that grow at a very fast pace, and there are those that grow at a slower pace, but still give returns that are more than inflation.

Fixed deposits and small savings instruments like Public Provident Fund are also forms of investments.

Not every investment instrument is suitable for everyone. If you are in the highest tax bracket, a fixed deposit would not give you returns exceeding inflation. Your money doesn't grow at a meaningful pace and therefore it doesn't necessarily do what a typical investment ought to be doing to your money box. But if you are in the lowest tax bracket and you are risk averse, then a fixed deposit works for you.

Putting money away in a savings bank account can be classified under 'savings' but not 'investment'. This is because in a savings bank account, your money lies idle. Too much savings and too little of investment doesn't create wealth.

In fact, with the proliferation of liquid funds and the instant redemption facility that many of them have started to offer, your savings, too, get a boost if you transfer your excess savings to a liquid fund account and keep a bare minimum in your bank account.

But even a liquid fund is just a parking vehicle; a savings vehicle. That is not investment. You need a basket of equity and debt funds, as per your risk appetite, as investments for wealth creation.

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Retirement rules are changing: We are high spenders sans inflation-linked pensions, family support

Travels during the year-end break helps me meet many people. This week’s story is about three seniors I met. The problem with those of us nudging the age 60 mark is that we don’t need much provocation to start worrying about our retirement. Here are some of the observations and lessons swirling in my head. 

Patil Mama is 92. He lives in his village and walks in his fields every day. He enjoys his food, keeps his routine, and sleeps under the stars every night. Shakuntala Mami is 76 and lives by herself in a rented house. She is immersed in spiritual and religious pursuits and spends her time teaching shlokas. Bawa is 68 and lives with his doting wife and son. He is unable to to walk or hold himself straight and his condition is deteriorating. 

First, all three draw pensions from the government. A tidy sum that appreciates every year from dearness allowance, and gets reset when pay commission recommendations are implemented. Even Mami, who draws a widow’s pension, says she has enough. So many of us now work for the private sector. Those who work for the government now have the NPS. The annuity markets pay too little and the era of guaranteed returns is gone. 

When it is time for our retirement, we will have to use finer techniques to draw upon the corpus, without depleting it. Simply depositing the money in a bank and earning interest may not be enough. How do we make the corpus grow while using it? 

Second, they all lead simple and frugal lives. They are not holding back because they have retired, but it is just that their lifestyles have been very simple. They do not care much for the luxuries that we take for granted. They don’t need expensive gadgets or clothes; they eat simple food; they are happy to travel by public transport. It is their simple habits that make their pensions adequate, leaving behind a small saving at the end of the month. 

We on the other hand, have converted into a society of consumers. We love material things; we can’t stop buying and replacing stuff. We also have begun to feel quite entitled to luxuries. Would those of us who are on the verge of retirement, be willing to give up the luxuries our corporate lives have afforded us? We may still need the car; we may have the time but still choose to fly; and we may not turn the air conditioner off just because we have retired. A spending creep has taken over while we haven’t noticed. 

Third, the quality of the seniors’ lives is determined primarily by their relationships and their health. Mama is still the patriarch who the village respects. No decisions in the household or farm are taken without his approval. He presides over most family functions and relatives routinely come by to meet him and seek blessings. Mama is a beneficiary of the fast-fading patriarchal order. Mami is loved for being the dynamic and fearless lady who lives by herself. Her neighbours and friends dote on her. Bawa, however, is a lonely man. He speaks little, is mostly by himself, and his wife worries if he is depressed. 

We are a generation that did not grow roots. We went where the jobs took us, made friends along the way, and hope for a retirement where we will make more new friends in the retirement villa we have bought. We revel at our social skills and feel confident that we won’t be lonely. Will a place filled just with the oldies be a happy one? We hope so! 

Fourth, the qualitative difference in their lives, and the joy in everyday existence is driven primarily by a strong sense of purpose. Mama is keenly following the efforts of his son to create orchards. The conversion of jowar, chilly and bajra fields into guava, sapota and coconut orchards excites him at every step. He has been following the process and keenly learning even at this age. 

Mami is learning new shlokas and hymns each day, so she can teach more people. She does not charge a fee but looks forward to hearing the stories of the women and children who come to her to learn. The buzz and interaction keeps her spirit high. She recently took a batch of North Karnataka women to Kumbakonam for a temple festival, and they can’t stop talking about how much they enjoyed it. 

Bawa is a sad man who does not practice medicine that he learned, or acupuncture and yoga that he mastered. He is not even motivated to improve his own condition with exercise or activity. He has been gripped with fear after an accidental fall a few years ago, and is unwilling to take help for his condition. He spends his time listening to music, sitting in his chair, and brooding over things he won’t talk about. Without purpose, so much of life is lost. 

Fifth, Mama hardly complains of health issues. He rests when tired, and is otherwise active. Mami keeps good health and has her routines of daily walk and exercise. Both of them love good food. Mama is fortunate to have his daughter-in-law cook what he likes. Mami is active enough to make her own food. Bawa sadly, is unwilling to see the doctor to get diagnosed and treated and has all but lost his mobility and independence. 

Many of us have begun obsessing about health—scared by stories of lifestyle diseases afflicting the middle aged. We may have to double our efforts at staying fit. We will have to remain in charge of our limbs and our body, and do whatever we can to stay active. We may also need a plan for our health and care when we age, for we may not have the luxury of a doting family hovering over us. 

While friends tell me lovely new age stories of how the newly retired travel the world, meet friends, eat out, and have a lot of fun, I remain concerned about the safety nets of pension, family, habits and health, not being present below our feet. Bawa’s deterioration sets alarms bells ringing in my head. I wonder if we are truly well prepared. 


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Why you should choose your tax saving options wisely

One’s personal finance situation changes with age. As a young earner needs to save and invest, but it is likely that his short term needs would eat more into his income. By locking his money into long term tax saving products, he might be making a mistake. He may find it difficult to keep up the investment required, or draw on it when needed. This common mismatch, especially for young investors results in dormant PPF accounts, discontinued subscriptions and missed premium payments. If  tries to access the money during times of need, he is likely to face penalties, lower realisation values or high costs. What he does to save taxes should, therefore, fit within his overall personal financial situation and needs. 

Tax planning is an integral part of financial planning, but should not be the key driver of investment decisions. Once figures out his financial plan, putting aside money to make the most of the available tax breaks would be easier. 

For investors like, liquidity needs may be higher due to unexpected expenses at the early stage of their lives. Tax-saving products come with lock-ins during which time they cannot even be pledged to raise money. He may need a term insurance much more than a Ulip; health insurance coverage more than retirement planning. Tax saving alone should not determine what he chooses to do. It might be a wiser thing to actually pay the taxes and retain the flexibility. 

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