Last Updated: February 2, 2023
Money doesn’t grow on trees. It grows through saving or investing. But only if you do it wisely. The differences between investing vs saving can be confusing. Both financial strategies, however, are sound options to reach your financial goals. This article addresses what investing and saving are and when to choose one or the other.
What Is Saving?
Saving is the act of putting an amount of money aside for future circumstances instead of spending it. But even though there are many benefits of saving money, it’s probably the most challenging endeavor. Therefore, when deciding to save money, it’s advisable to put the money somewhere safe yet accessible. When considering saving, think of emergency funds, saving accounts, and a certificate of deposit (CD).
How does saving work? One may save money via a savings account or keep it at home. Many opt to save their money at home because they doubt savings accounts are lucrative. But is a savings account worth it? Those who save money usually deposit money in a low-risk bank account, typically under Federal Deposit Insurance Corporation (FDIC) protection.
Some want their money to grow slowly by putting their savings into a low-return account. In contrast, others wish to maximize their earning interest rate by searching for the best way to save money and earn interest via the highest annual percentage yield (APY) savings account.
|NOTE: To feel financially secure, you should save three to six months’ worth of monthly expenses.|
When Should You Save?
As a general rule of thumb, saving almost always comes before investing because you need a foundation of money for investing. You should first save money rather than invest if you need the money within five years.
An emergency fund can be easily overlooked. But you need an emergency fund in a savings account to fall back on during emergencies. You should never think of an emergency fund as an investment but as insurance to protect yourself from financial surprises. Putting as much as $500 a month helps you to accumulate money in your funds.
Certificate of Deposit (CD)
A certificate of deposit is a low-risk account that can be a saving vehicle, especially if you plan on saving money over time for a large purchase. With a CD, you cannot withdraw money at any time but only after a designated period. So your money could stay locked away, for example, from three months to 10 years, depending on the program.
Cash for the Near Future
The best option for saving money for the future is to open a savings account under FDIC insurance. While there are pros and cons of a savings account, one downside of such an account is inflation, meaning that the dollar’s value could be worthless next year.
|NOTE: Warren Buffet offers sound advice for those wishing to save money: “Do not save what is left after spending but spend what is left after saving.”|
What Is Investing?
You can work for money or let the money work for you, which is why investing is important. Investing is the act of buying financial assets, such as stocks, bonds, shares, or exchange-traded funds (ETFs), with the thought of it increasing in value as time passes. Additionally, buying real estate is considered an investment, as well. Some investors even use an asset allocation mix strategy for better results.
But why do people invest, especially knowing there are risks involved? If you invest wisely, there’s a high possibility of doubling the money you’ve invested, no matter the risks.
Investing is simple. For instance, you buy shares, wait until their value increases and sell them at the best possible moment. With a bit of risk tolerance, putting money aside in your investment account as early as you can is worth it in the long run. But what is an investment account? Such an account is when you link your current account, for example, to a securities account in brokerages.
|NOTE: Before you invest, you need to have a financial goal and invest in what you think best fits your needs—not in what is trendy at the moment.|
|The most significant difference between savings vs investment is in the level of risk.|
|Saving is when you put money aside, usually in a savings account.|
|Saving is associated with reaching your short-term goals.|
|When taking a risk to double your hard-earned money, investing should be your choice.|
When Should You Invest?
When and why do people invest? Investing can help realize long-term strategies, such as retirement planning, a downpayment on a house, or paying off debt. Consider the following times to invest:
After Living Expenses Saved
The main difference between saving and investing is that you can start investing after you have three to six months of monthly expenses saved because you can ferry setbacks and money losses, at least for some time.
If you plan to invest your retirement money, invest it, for example, in Roth accounts. But many confuse pension and 401k with being one the same thing. Learn the fundamental differences between the two.
House Down Payment
The average down payment in the US is below 20%. But many have to save almost a lifetime to accrue that much. If you have an appetite to take a risk, you can put your down payment fund in a brokerage investment account.
Suppose you consider yourself inadequate with investing money. In this case, a Robo-advisor can help you understand why investing is important while offering a hands-off approach for those willing to put their investments on autopilot—auto investing by setting up automatic transfers.
But before Robo-advisors existed, investing in the stock market was managed by private advisors who were paid an hourly rate. Today, there’s a wide range of Robo-advisors on the market which offer low-cost diversification and constantly update your portfolio.
|NOTE: Investing in stocks is very popular these days. And there are many tips and tricks in determining a stock’s valuation.|
Investing vs Saving
In defining the saving vs investing comparison, saving is used for putting money aside. In contrast, investing requires taking a greater risk and buying assets that will increase value over time. The comparison table below summarizes the differences between the two.
Investing vs Saving
|Period||Typically for a shorter period of five years for accomplishing such goals as going on a vacation.||Used for more than five years for such long-term goals as planning for retirement.|
|Risk||Little to no risk, especially those with FDIC insurance.||Depending on the investment category, there’s a great risk of losing your investment money if something goes wrong.|
|Returns||Relatively low||Can be higher|
|Options||For emergency funds, saving accounts, and a certificate of deposit (CD)||For stocks, bonds, mutual funds, and exchange-traded funds (ETFs).|
|Difficulty||Easier than expected||Harder than expected|
|NOTE: When considering savings vs investment, savings is the safer option but prevents you from an opportunity to earn a higher return.|
Saving and investing are two different financial terms that shouldn’t be used interchangeably. They both, however, are essential for sound financial planning and preparing for the future. This article should help when deciding which financial option is a better choice for you.
While there are many benefits of keeping cash at home, it’s advisable to deposit your money in a bank rather than at home. This is because your money in the bank earns interest—it may be a relatively small amount, but you can still make more money than what you’d keep at home.
When you put your saved money in banks, you are, in essence, lending that money to them, which is why you earn interest. Then, the bank channels that money into loans.
When it comes to investing vs saving, it depends on your current financial situation. If you need money—for example, in the next five years—saving is the best option. Alternatively, if you plan on saving for something in the distant future, then investing is more in your line of needs.