Investment versus Savings

When an individual saves money he/she puts aside excess income in a place that is considered to be safe. In order to save the individual must use less money than he/she gets during a period. The individual chooses to use less in the current period so that he/she may be able to afford the use of some product or service at a future date – like putting aside money for a vacation. Some individuals consider safe places to be a chequing or savings account or a certificate of deposit at a deposit taking institution. The bottom line is, when the money that was put aside is needed, the individual has easy access to the amount that was initially saved.

When an individual invests money he/she puts that money to use (productively) in an activity that generates a profit that the individual anticipates receiving. The individual expects to make money.That profit may be realised because the value of the venture increases (capital gain) or a portion of its income is paid to the individual (dividends).

Unlike savings, the initial amount of money that is invested (principal) may not be readily accessible (as it may have been converted to some factor of production). Additionally, because the value of the investment is determined by the success of the venture, the individual may earn less than is expected or may even lose the money invested. But investment can provide the opportunity to earn more than savings. The individual receives less (interest) for savings because it is relatively more secure and readily available.  As there is a greater chance a person can lose and the principal may not be readily accessible, investments carry higher risk therefore the potential for higher returns.