Saving vs Investing: What's the Difference?
June 8, 2023
When it comes to growing wealth, you have a few options. The most common are saving and investing money, but how do these strategies differ? Do you have to settle on just one?
Fortunately, these are not new concepts, and they each work differently to help you build over time, meet your goals, and reduce the risks you experience throughout your life.
Here’s what you should know about each important financial concept.
What Is Investing?
When you put your money into financial instruments like stocks, bonds, or mutual funds, you are investing it. Investing can help you turn your initial investment into a larger sum through interest and dividends, but this isn’t always guaranteed. It comes with some risk, although you can decide how much risk is right for you and pick an investment opportunity that will match it.
What Is Saving?
Saving money is the act of putting it aside and not using it, so it can be used for a future goal. Whether you save $50 for lunch at your favorite diner next month or save $1,000 to put a down payment on a car, you are saving.
Many people save gradually over time, putting more and more money away for a goal; it’s also possible to put a big chunk of cash away. The choice depends on how much extra money you have each week or month for a savings goal.
4 Key Differences Between Saving and Investing
Saving and investing help you put your money toward future goals and can help you earn money over time. Beyond that, they are very different in how they work.
1. Risk and Return
As we mentioned, investing isn't 100% risk-free. If the company or fund you invest in goes bankrupt, you could possibly lose everything. Those experienced in investing, however, generally make more from their investments than they ever could with straight savings accounts or CDs.
Saving, like investing, can give you returns on your money, usually through interest. A certificate of deposit, for example, rewards you for putting your money there with interest that builds over time. Like investing, savings lets you “put your money to work,” but because it’s typically protected from most risk, the earnings might not be as high. As a result, it may take you longer to reach your goals with this more cautious approach.
How important is it that you can access your money right away? If being able to use your money, also called “liquidity,” matters most, you’ll want to consider how to best store your money.
Investing isn’t as liquid in many cases because stocks need to be sold, and then the money must be put into your account. This can take time. Other options, like a 401(k), may not be accessed right away without significant fees or penalties.
Savings options, such as a savings account, could let you get your money within hours. Other options, like a CD, may not be accessed as easily without losing interest or even paying a fine. Know your savings product before deciding.
3. Short and Long-Term Goal Setting
While there's no one-size-fits-all guidance on this, investing generally aims at long-term goals where the money has time to build and grow. There will usually be setbacks along the way, with your investment losing value here and there. The general long-term goal is to give it many years to reach its fullest potential, making it great for big initiatives like your retirement.
Savings can be used for both long and short-term goals, and many people do just this.
4. Inflation Hedging
You may have noticed things cost more than they used to. This is inflation. How much inflation we experience depends on a number of factors, but savings and investing are both designed to tackle it in different ways.
In times of high inflation, where your savings account won't earn as much interest as the rise in the cost of goods, common savings tools might not make as much sense. However, inflation usually accompanies big swings in the market, making even those high-interest investing opportunities a bit more riskier than normal. You’ll want to consult a professional before making inflation-fighting money moves.
When to Invest
Investing works best when you:
- Need to save for a large, long-term goal such as retirement or college
- Don't need to get your money right away
- Are OK with someone else managing it
- Have enough saved in an emergency fund and can endure any market losses
- Would like the highest possible rate of return through advanced wealth-building methods
Saving works best when you:
- Have a small or short-term savings goal
- Feel confident you can meet the goal through a disciplined approach of setting aside money
- Want access to your money at all times
- Can’t afford to lose any of it
- Are happy with the lower rate of return
Why Saving and Investing May Be Best
The beauty of personal finance is that you don’t have to pick just one strategy at any one time. It’s perfectly acceptable (and even encouraged) to use various methods to help your money grow. For example, you might put $500 in a CD and $500 in the stock market. Some people even put their money in investing tools, like a 529 college plan, that puts more money toward risker assets at the beginning of the savings plan and moves it into less risky assets as the student gets closer to college age.
It's wise to partner with a trusted financial professional because there’s so much to think about with how and when to save vs invest. In addition to helping you know about all of the available account types on the market today (and there's a lot!), they can guide you in setting goals, addressing your risk tolerance, and picking a plan to help you feel good about your money.
Set up a time to talk to a Centier representative and explore your options.