Setting money aside for a future time is always a wise decision, but not always an easy one. Add to this the choice between saving your money and investing it, and the task can become a bit overwhelming. The difference between saving vs investing can be summarized like this:
- Saving is a way of setting aside money for the short term, or a long-term goal.
- Investing is a strategy of putting money into an asset or venture with the intention of making more money as that asset or venture grows.
Saving and investing are both ways of accumulating money, but each carry different risks and rewards. Understanding the differences between the two is essential to building a solid financial foundation. Once you do, you’ll be able to get the most out of your surplus income by knowing when it’s time to save, and when it’s time to invest.
Whether it’s in your sock drawer or a high yield savings account, saving money is a way of setting aside cash for another time. The money you place in a savings account is usually easily accessible via withdrawal or transfer. This means that the money is liquid, and should you need that money for an emergency, you’ll be able to easily obtain it.
Though a savings account may accrue a small amount of interest each month, this does not make it an investment. According to the FDIC, the average Annual Percentage Yield (APY) across all savings accounts in the U.S. is currently .08 percent. This isn’t much, but it helps ensure your money doesn’t lose purchasing power with inflation. Plus, saving money is much less risky than investing, as money saved isn’t likely to lose value.
Other types of savings accounts include Certificates of Deposit, interest checking accounts, and money market accounts.
Investing is when you purchase something with the intention of generating more income. Types of investments typically include stocks, property shares, or mutual funds. This method of saving typically makes your money less accessible because, in order to withdraw any dividends or earnings, you will first have to sell a portion of your assets.
There are many ways to invest, depending on how long you plan to leave your money invested, and your tolerance for risk. Many experts recommend investing only when you will not need the money for at least three to five years. Though investments can come with a larger rate of return than savings, there is a greater risk associated with them. It is possible to lose money in stocks when the market or company takes a downturn, or lose value in a property if there’s a natural disaster.
Comparing Saving and Investing
Saving and investing can both be a part of a healthy money management strategy. Take a closer look at the differences between the two to fully understand the benefits and drawbacks to each:
Should You Invest or Save Your Money?
Depending on how much money you have, your expenses, and when you may need those extra funds, you can decide whether you should save or invest. Neither option is necessarily better than the other, as it all depends on what your needs are. Here are some questions to ask yourself:
Do you have an emergency fund? Many experts don’t recommend investing unless you have some money already saved in an emergency fund. So if you don’t already have at least three to six months worth of expenses in savings, you should begin there to help offset the risk of investing.
Does your employer match your retirement? You should consider your long-term financial goals even if your retirement seems far off. If your employer matches a 401(k) or other retirement account contributions, you may want to invest up to the matching limit so as not to lose out on that money.
Do you have any high-interest debt? You should take into account the interest rates of your highest-interest debt before saving or investing anything that you don’t need for emergencies. Compare the interest rate of your loan against the average rate of return for savings accounts or investments. Most of the time you’ll lose money by investing or saving rather than paying down debt.
What are your short-term financial goals? If you plan on making a major purchase within the next year or two, it may be a good idea to put your money in a savings account. Not only is your money more easy to withdraw, but the amount you put into savings is less likely to decrease. Investments are less predictable, especially in the short term, and can even cause you to delay a major purchase if your account loses value.
Ultimately, only you can decide whether saving vs investing is right for your situation. Carefully consider your options since saving and investing can both set you up for a successful financial future. It can be overwhelming at first, so if you find you still aren’t sure, don’t be afraid to talk to a trusted financial advisor.