How Much Should You Save And How Much Should You Invest?

If you look around, most of us have the same story. Got a job – check, earned a paycheck – check, spent most of it – check, saved and invested a sum of it – Ummm, next month onwards. The cycle pretty much continues and then you realise that you have splurged money extravagantly for things you didn’t need instead of saving or investing it wisely.

A common finance related query most of us think of is – how much should I save and where do I invest. Getting the right answer to these questions is a tough task. Often, you get to hear technical jargons when you try to talk to industry experts, and more often than not, they deter your financial decisions. Due to this indecisiveness, you end giving up on the thought of saving or investing as you don’t get a clear picture of where to invest your money.

So to get clarity on that thought process, here is what you need to know about saving and investment.

Difference between “Savings” and “Investment”

“Saving” or “Investing” – aren’t both one and the same? Not really. Let us first understand the difference between these two financial terms.

Saving usually implies to keep the money aside in a savings account or as cash, allowing you to have the money back whenever you want or after a stipulated time with little or no risk of losing the money with minimal gains.

Investing on the other hand implies to putting aside the money for better gains or rewards (larger returns) with potential risk of loss if you decide to access that money at any given point of time before the stipulated ‘maturity’ period.

Savings should be on short-term basis and investments should be on long-term basis because you would usually want to save for spending on a holiday trip that was long overdue or to manage funds in case of dire medical emergencies. Savings is basically money set aside, which will be spent within a few days for different reasons. Investments will help you with great returns but at the risk of ‘locking’ your money without immediate access to it.

How much should you save and invest?

Your motto should be – “First save, then invest”. Why? Because your saving is the capital amount that is needed to feed your investment. To make it simple – we save for emergencies and purchases but we invest for better returns. Saving keeps our money safe with very little returns whereas investments help us make more money with potential risks.

Now coming back to our question “How much should you save and how much should you invest?” There is no definite thumb role but it is advisable to “save 10% of your income” and “invest 10-15% of your income”.

There are two important things that need to be considered when you decide on the amount you would save on a regular basis:

• Always prepare a budget and check on the expenses (monthly expenses, EMI, debts etc) that need to be covered on a monthly basis and then decide the amount you would want to save regularly. Ensure you strictly adhere to your saving policy, once you decide on an amount.
• Generally, you get into the saving mode when you need a “large sum” in few years for a specific reason or if you are looking to take a break from your full-time job. In such scenarios, your savings should be able to cover your expenses, EMI, regular bills or mortgage for a minimum period of six months.

When it comes to investing, you need to be very smart in choosing the right mode of investment. Talk to a financial planner or a certified advisor to make these choices if you think you are unable to choose the right plan. Investment should always be looked at as a “long term plan”. Don’t forget to increase your investment as your pay scale increases. Never plunge into investment without having a savings backup for a rainy day.