Both saving and investing are important concepts to build a solid financial foundation. However, they are not the same thing. Both can help you build a better financial future. However, it is important to understand the differences between investing and saving .
The most important difference between investing and saving is the risk you take. Savings typically have a lower return, but you take on very little risk. However, investing can offer you the chance to earn a higher return but with a greater risk.
These are the main differences between them, and why you should use both strategies to build long-term wealth.
Saving vs. investing explained
The act of saving money is to save for future expenses or needs. You want the cash to be available quickly so that you can use it immediately if you decide to save money. Saving money can also be used to achieve long-term goals, particularly if you want to ensure you have enough cash at the right moment.
Savings are usually made in low-risk accounts. If you want to maximize your earnings, choose the highest annual percent yield (APY), savings account as long as it meets the minimum balance requirements.
Investing is like saving, except that you are looking for a higher return for your investment. You can invest in stocks, bonds and mutual funds, as well as ETFs (exchange-traded funds). To buy or sell ETFs, you will need an investment broker/broker account.
You should aim to hold your money in an investment for at least five consecutive years if you are looking to invest. You can lose your money on investments that are volatile in short time periods. It is important to not invest in money you don’t need right away, especially if it is less than a year.
Are saving and investing similar?
You can see that both investing and saving have different characteristics, but they all share the same goal: to help you accumulate wealth.
Chris Hogan, financial expert, and author of Retire Inspired, says that both require putting money aside for future purposes.
Both can accumulate money by opening specialized accounts at a financial institution. Savings can be done by opening an account with a bank such as Citibank or a credit union. Investors will need to open an account with an independent broker. However, many banks now have a brokerage arm. The most popular investment brokerages are Charles Schwab and Fidelity. There are also TD Ameritrade online options such as ETrade.
Both investors and savers know the importance of money. Before they invest large amounts of money in long-term investments, investors should ensure that they have enough funds in their bank accounts to cover unexpected expenses as well as any other costs.
Hogan explains that investing is money you plan to leave alone, “to allow it grow for your dreams or your future.”
What is the difference between saving and investing?
“When you use the terms saving and investing, people – really 90-some% of people — think it’s the same thing,” Dan Keady is a chief financial planning strategist at TIAA.
Although there are some similarities between the two, investing and saving are very different. This is due to the type of assets that are held in each account.
Think of savings products like money markets, savings accounts, CDs, and certificates of deposit when you think about saving. Keady suggests that mutual funds, stocks, ETFs and bonds are all options when it comes to investing.
Saving: The pros and cons
There are many reasons to save your hard-earned cash. It’s often your best bet and the most secure way to keep any cash from running out. It is also simple to do and you can get the funds fast when you need them.
These are just a few of the many benefits that saving can bring:
- Savings accounts will tell you upfront how much interest your balance will earn.
- Federal Deposit Insurance Corporation guarantees bank accounts of up to $250,000. This means that even though the returns may be lower, you won’t lose any money if you use a savings account.
- You can access bank products quickly, so you will be able to get your money when you need it. However, you might have to pay a penalty if you wish to access a CD that is older than its maturity date.
- There are no fees. There are no fees.
- It is usually simple and straightforward to save money. There is usually no learning curve or upfront cost.
Savings can have its benefits, but there are also some downsides.
- You could make more by investing, but there is no guarantee that you’ll get higher returns.
- You may lose your purchasing power as inflation eats away at money and returns are very low.
The pros & cons of investing
While saving is safer than investing, it won’t result in the greatest wealth accumulation over the long-term.
These are just some of the many benefits you get from investing your money:
- Stocks can offer higher returns than CDs and savings accounts. The Standard & Poor 500 stock index (S&P 500) has been returning about 10% per year over time. However, this return can fluctuate significantly in any given year.
- Investing products tend to be very liquid. Stocks, bonds, and ETFs are easily convertible into cash almost every weekday.
- A broad portfolio of stocks will help you beat inflation over longer periods of time and increase purchasing power. The Federal Reserve currently uses a 2 percent target inflation rate. Your purchasing power will decrease if your return is lower than the inflation rate.
There are many drawbacks to investing, such as:
- You cannot guarantee returns and you may lose money in the short-term as your assets’ value fluctuates.
- You may not receive back the amount you invested depending on the time you sell the property and the state of the economy overall.
- To avoid any downdrafts, you’ll want your money to stay in an investment account at least 5 years. You should hold on to your investments for as long as you can, which means that you shouldn’t access them.
- Because investing is complex, it’s likely that you will need expert assistance if you don’t have the time or skills to learn how.
- Brokerage accounts can have higher fees. Although many brokers offer free trades , you may need to pay fees to trade stocks or funds. You may also need to hire an expert to manage your money.
Which is better, saving or investing?
There is no better way to save money than investing. Your financial situation will determine which option you choose.
These are the two general rules to remember.
- A savings account or CD may be your best option if you have an immediate need for the money or you plan to use it as an emergency fund.
- You should likely invest the money if you aren’t going to need it for five years or more, and you can tolerate some capital losses.
Keady states that real-life examples will be the best way to demonstrate this. Keady says that if you want to pay your child’s college tuition within a few months, it should be done in savings. This could be a savings account or money market account.
Keady states, “Otherwise people might think, “Well, you know? I have a whole year and I’m buying something. Maybe I should invest in stock market.” “This is gambling, not saving.”
It’s the exact same with an emergency fund. This should not be invested, but saved instead.
Hogan states, “So if there is an illness, job loss, or any other reason, you don’t have to go back to debt.” You’ve got money that you have intentionally saved to provide a cushion between your life and the rest.
When is investing more profitable?
Investing in the stock market is better for long-term money, money that you want to grow faster. You can invest in the stock market, mutual funds , or in exchange-traded funds depending on your risk tolerance.
You will have more time to weather the inevitable downs and ups of the financial markets if you can keep your money in investments for a longer period. If you have a long-term goal (ideally, many years), and don’t need the money immediately, investing is a great choice.
Hogan states, “So if somebody’s starting with investing, I would encourage him or her to really look into growth-stock mutual funds to be a great way to get started.” “And really understand the world and how money can grow.”
Although investing is complex, there are simple ways to start. It is important to learn more about investing and why it might be the right step in your financial future.