It’s great to save money, but investing to really makes it grow. You may simply want to save money to avoid the risk of losing even minor gains. But it can be hard to make your money work for you if your are completely adverse to investing. Saving will give you cash to fall back on, but it may not help it grow with a changing market and economy. Learn the difference between saving and investing and why it’s so important.
An objective outside opinion offered by an expert can help distinguish your savings and investing goals and practices. A financial advisor can clarify those two important priorities for you.
Saving vs. Investing Fundamentals
Saving and investing are both ways to accumulate money. Beyond that, they are very different.
You are saving any time you don’t spend money in your possession. Whether it’s piling up in your wallet, bank account or the couch cushions, money not paid out is saved. You also save money in another sense when you reduce expenses. For example, when you negotiate a lower cellphone service rate.
But that’s a different kind of saving. Compared to investing, saving is putting money in a savings account, money market fund, certificate of deposit or something similar.
You invest when you buy assets such as mutual funds, stocks, bonds, real estate or commodities. Rather than just accumulating money earned, investing can generate income of its own.
Differences Between Saving and Investing
To begin with, saving and investing generally being with different goals in mind.
Saving is often intended to fund a specific use or purchase. You might save to create a rainy day fund, take a vacation or making a down payment on a home.
Investing may raise money for a specific purpose such as paying for a child’s college education or funding retirement. But it is also intended to build wealth by generating investment returns rather than just accumulating money.
Risk and Saving Versus Investing
Risk can be a glaring difference between saving from investing. Money in savings should be as well protected from loss as possible. A savings account at a bank insured by the Federal Deposit Insurance Corp. (FDIC) is an example of a good place for savings.
Investments, on the other hand, generally involve more risk of loss. Shares of stock fluctuate in value, for example. If an investor must sell stock when the price is down, losses could consume some or all the money invested.
Time Frame for Saving and Investing
Saving and investing also usually involve different timetables. If money is expected to be needed in a year or less, it should be treated as savings.
For investing, a time frame of at least three years is generally considered necessary. This means you should only invest money you don’t expect to need for at least three years.
It isn’t always that tidy. An emergency fund accumulated without knowing when the money will be needed is still savings. An investor could keep cash in a money market mutual fund to have ready for a buying opportunity.
A long time frame helps investors manage risk. Waiting three years before selling shares gives prices time to recover from a bear market.
Returns On Saving vs. Investing
Saving is more about avoiding risk than generating return. That’s why a savings account paying less than 1% interest can be perfect for a new-car fund. It may not earn much but it’s safe.
Investors take a more nuanced approach to managing risk and reward. By investing in non-insured assets such as stocks and bonds, they take more risk. They will try to balance risk and reward so they don’t assume more risk than needed to reach their goals.
Savings vehicles rarely generate returns in excess of inflation. Over the long term, money in savings will likely lose purchasing power. This is considered inflation risk.
Investing, on the other hand, will likely enable you to beat inflation. Historically, the stock market has returned approximately 8% a year. That’s well in excess of the long-term inflation target of 2% set by government policy makers.
Cost is another way to differentiate saving vs. investing. You can save on your own for free. Investing often requires professional assistance of some kind along with fees.
Timing is a final difference. A well-conceived financial plan addresses both saving and investing. But saving is often considered the primary need. Only after a saver has enough to cover three to six months of expenses do many experts recommend considering investing.
Bottom Line
Saving is easy. At its most basic, all you have to do is not spend. Even more complicated savings actions such as purchasing a CD can be handled in minutes at your local bank.
Investing is more complicated. It requires self-examination to determine your risk tolerance and objectives. It takes more study to identify stocks, mutual funds and other assets that will help you reach those goals.
Saving and Investing Tips
- A financial advisor can help you determine just how much you need to be saving or investing. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
- If you’re still unsure how much risk you can handle or how much you should be investing, SmartAsset’s investing guide can help. It can help you determine your risk, calculate your ongoing investment, and determine how inflation and taxes will affect your returns.
- While saving is as easy as not spending less, there are several ways to save money and keep it safe. SmartAsset’s savings calculator can show you how your savings can grow through different interest rates,
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