Which is better – Saving or investing?

Saving and investing are two words used interchangeably, but they are indeed quite different from each other. While we stand to benefit from being a saver in certain financial aspects, it pays big to play the investor role in all the major areas of our finances, as can be seen in this article.

When to be a saver?

When buying depreciating assets such as white goods, gadgets & vehicle(s), it helps to be a saver. Even if you do not have 100% purchase money, try to save up to 70% of the cost of the depreciating asset and then make the purchase. This way your loan / EMI liabilities would be low and you could also quickly re-pay the balance amount, there by incurring minimal interest costs.

When to be an Investor?

When buying appreciating assets such as a home, it helps to be an investor. An investor too saves to pay for an initial down payment and takes a loan to complete his home purchase. Lets say Jai had saved Rs.10 Lacs in 2005 and made it as down payment to buy a home in 2005, by taking a 7 year home loan for Rs.40 Lacs. Although he incurs a total interest cost of Rs.13Lacs to repay his home loan, the appreciation of his property to Rs.80Lacs offsets the interest cost, there by making his investment worth the loan.

It seems to be simple to classify physical assets as appreciating or depreciating and decide to be an investor or a saver. But what about financial assets? How could you determine whether a financial product is appreciating or not? The secret lies in the mechanics of whether the product works on simple interest or compound interest.

Recurring deposits of Bank, Post office, provident fund schemes such as EPF, PPF & capital instruments like Mutual Funds are some examples of financial products that gives returns based on compound interest. A good investor would choose a product that provides him/her with returns that compound annually, where both the principal & the interest work hard to multiply your money over time.

To attain financial success, you only need to identify appreciating assets that compound annually and add them to your portfolio!