Saving vs. investing: Here are the key differences for managing your money
The biggest difference between saving and investing is the level of risk taken. Saving typically allows you to earn a lower return but with virtually no risk. In contrast, investing allows you to earn a higher return, but you take on the risk of loss in order to do so.
Here are the key differences between the two – and why you need both of these strategies to help build long-term wealth.
Saving vs. investing explained
Saving is the act of putting away money for a future expense or need. When you choose to save money, you want to have the cash available relatively quickly, perhaps to use immediately. However, saving can be used for long-term goals as well, especially when you want to be sure you have the money at the right time in the future.
Savers typically deposit money in a low-risk bank account. Those looking to maximize their earnings should opt for the highest annual percentage yield (APY) savings account they can find (as long as they can meet the minimum balance requirements).
How are saving and investment similar?
As you can see in the table above, saving and investing have many different features, but they do share one common goal: they’re both strategies that help you accumulate money.
“First and foremost, both involve putting money away for future reasons,” says Chris Hogan, financial expert with Ramsey Solutions and author of Retire Inspired.
Both use specialized accounts with a financial institution to accumulate money. For savers, that means opening an account at a bank or credit union, such as Citibank. For investors, that means opening an account with an independent broker, though now many banks have a brokerage arm, too. Popular investment brokerages include Charles Schwab, Fidelity and TD Ameritrade, as well as online options like E*Trade.
How are saving and investing different?
“When you use the words saving and investing, people – really 90-some percent of people – think it’s exactly the same thing,” says Dan Keady, CFP, and chief financial planning strategist at TIAA, a financial services organization.
While the two efforts share a few similarities, saving and investing are different in most respects. And that begins with the type of assets in each account.
So which is better – saving or investing?
Neither saving or investing is better in all circumstances, and the right choice really depends on your current financial position.
Generally, though, you’ll want to follow these two rules of thumb:
- If you need the money within a year or so or you want to use the funds as an emergency fund, a savings account or CD is your best bet.
- If you don’t need the money for the next three years or more and can withstand a complete loss, then you can invest the money.