Things You Should Know if You Plan to Invest or Save Money

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.

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.

Emergency Fund

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.

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.

Key Takeaways

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.

Retirement

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.

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.

Conclusion

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.