Saving vs. Investing: 2 Ways to Reach Your Financial Goals (2024)

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Jan 23, 2024

By Sarah Spagnolo

Saving and investing are different—and each serves a unique purpose in a financial plan. When you learn the distinction, you can plan with more confidence.

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When you’re mapping out a plan to reach your financial goals, you don’t have to choose just one path. It’s not about whether saving or investing is the better choice, but rather understanding the unique ways both saving and investing play crucial roles in working toward your financial aspirations. While saving often involves setting aside money for an emergency fund or a specific short-term goal like buying a new car, investing is a long-term strategy that helps your money grow over time by generating returns. Investing money and building up your cash savings are both valuable ways to ensure your financial needs are met now and far into the future.

What’s the difference between saving and investing?

Savings are usually designated for short-term financial goals or emergency funds and kept in a savings account at a bank or credit union. People often save up the money they have left over after covering their monthly expenses. On the other hand, investing involves purchasing assets like stocks, bonds, exchange-traded funds (ETFs), or mutual funds to earn returns. People generally invest with the hope of reaching long-term goals and earning more money over time than they would if they put the same amount of money into a savings account.

In this article, we’ll cover:

  • Key differences between saving and investing
  • When to save and when to invest

The key differences between saving and investing

Saving and investing are distinct financial concepts. While they both involve putting money toward the goal of increasing your assets in the future, they have very different functions and results when it comes to time horizon, potential for returns, liquidity, risk, and inflation. Once you understand the differences, you can determine how each fits into your financial plan.

Time horizonShort-term goals (5 years or less)Mid- to long-term goals (5+ years to several decades)
ReturnsLower, based on typical savings account interest ratesHigher, depending on asset and market performance
LiquidityHighly liquid, few limitationsLess liquid, more limitations
Associated riskRelatively low riskHigher risk
Impact of inflationMay eat away at the future value of your moneyReturns often outpace inflation rates

Your future goals

Some of your future financial goals are achievable sooner than others. If you’re looking at the short term, think of savings. If your goal is further into the future, consider investing.

  • Short-term goals: Saving can be a good choice for achieving short-term financial goals like taking a vacation, buying a car, getting a new computer, or putting a down payment on a home. Opening a savings account is also ideal for building up an emergency fund to cover large, unexpected expenses or get you by if you lose your job.
  • Long-term goals: In contrast, investing is more appropriate for achieving large goals far in the future, like paying for your kid’s college education or setting yourself up for retirement. Investments have the potential to grow your money more over time by earning higher returns than you’d get from earning interest in a savings account, but you may need to keep your money invested over the long haul to realize those gains.

Potential returns

The return on investment (ROI) differs quite a bit between saving vs. investing. The entire point of investing is to earn returns. Saving is more about setting aside money over time, but earning interest in a savings account certainly does grow your money more than hiding it in your mattress. Most traditional savings accounts pay some interest, and you can often earn an even better rate with high-yield savings accounts, money market accounts, and certificates of deposit (CDs). Interest rates are variable, and often rise and fall in relation to inflation. The longer you keep your savings in an interest-bearing account, the more you can take advantage of compound interest, which is when the interest you’ve earned also earns interest.

The ROI on different types of investments can vary greatly, but over the long term they usually outpace both inflation and what you could earn through interest in a bank account. The historical average return for stocks is around 10%, while bonds have historically produced 5% to 6% in returns on average. Other investment vehicles like mutual funds, index funds, and ETFs vary quite a bit in their average returns, since each fund contains a different mix of multiple assets. But because they usually hold stocks and bonds, funds tend to offer more lucrative long-term returns than a simple savings account.

Impact of inflation

Inflation measures how much the cost of products and services rise over a given period of time. When inflation goes up, your purchasing power goes down; your dollars don’t go as far as they used to. This is an important consideration for your savings. If the interest rate on your savings account is lower than the inflation rate, it erodes the value of your savings over time.

The money you earn today will have less purchasing power in a couple decades, so you want your investments to generate enough returns to compensate. Investing is often used as a hedge against inflation because the returns are generally higher than inflation over the long term. That’s why investing is typically advised for financial goals far into the future, like retirement. In fact, some investors pursue strategies intended specifically to profit from inflation.

Liquidity (how accessible your money is to you)

Liquidity describes how quickly you can get your hands on your money. Cash is your most liquid asset; actual dollar bills in your wallet can be spent any time. Money in your savings account is also incredibly liquid because you can easily withdraw it at the bank or ATM. The only drawback is that some savings accounts charge a fee if you make more than six withdrawals a month. Liquidity gives you the flexibility you need to spend your savings, such as tapping your emergency fund for a big car repair or buying that TV you’ve saved up for when it goes on sale.

Investments are typically less liquid than savings; the amount of rigidity varies among asset and account types. Certain types of investment vehicles, like bonds, may have a fixed term that requires you to stay invested for a certain amount of time. Stocks and shares of many funds are more liquid in that they can be sold any time, though it usually takes three business days to get your money. And if you’re selling stock because you need the money for an emergency, you run the risk of having to sell at a loss. Tax-advantaged retirement accounts, which are types of investment accounts, are extremely inflexible; you usually can’t withdraw money before age 59 1/2 without incurring steep penalties. Finally, if you invest in things like collectibles or real estate, your money is locked up in those assets until you can find a buyer, which could take a lot of time and effort.

Risks involved

People usually think about risk when it comes to investing, but not savings. It’s true that putting money into savings is generally quite low-risk. As long as you keep savings in an FDIC-insured bank account, you’re protected even if the bank were to go under. That said, saving money comes with certain risks, too. For example, if you only keep money in a traditional savings account without investing some of it, you run the risk that it won’t grow enough to keep up with inflation, leaving you with a lot less spending power in retirement. There’s also the risk associated with variable interest rates. If your bank drops interest rates, the return you’re earning on your savings will drop as well.

With investing, there’s always the risk that you could lose money if the value of your assets drops below what you paid for them. Business risk is the potential for a stock to lose value due to financial or management issues with the company. Geopolitical risk comes into play when things like war, terrorism, and trade relations impact the economy. And overall market volatility can cause the value of your portfolio to fluctuate. One way investors can manage these investment risks is by diversifying their portfolios. Diversification reduces risk by spreading the holdings in your investment portfolio across different asset classes like stocks, bonds, and funds. If one of your investments loses value, others may hold steady or even grow.

When to save your money

How do you decide when you should be saving vs. investing? Consider what you’re trying to achieve. Saving is well-suited to funding things you want within a few years and protecting your financial well-being when life throws you a curveball.

  • Financial goals: If there’s a large purchase you want to make in five years or less, saving for it makes sense. That’s too short a time to be confident that investments will grow, but not so long a timeframe that inflation is likely to seriously erode your purchasing power.
  • Emergency funds: If your dog needed emergency surgery tomorrow, could you pay for it without going into credit card debt? What about if you were laid off; how long could you cover your basic living expenses before your bank account was empty? These kinds of scenarios are exactly what an emergency fund is for. Putting aside money to cover unexpected expenses is one of the primary uses for a savings account.

If you want to save up more, look for ways to spend less. From sticking to a budget to reducing discretionary spending to lowering your bills, reducing how much money you spend increases how much money you can put into your savings.

Places you can park your cash and save

When you’re stashing money aside for an emergency fund or savings goal, you can put it to work earning interest so your savings grow faster. There are several different kinds of deposit accounts where you can store your savings, and they vary in the details of potential interest rates, liquidity, minimum balances, and fees.

  • Traditional savings account: A basic savings account usually offers a pretty low interest rate; the average APY (annual percentage yield) was 0.46% as of December 2023. But there are often low or no minimum balances or fees, making them accessible if you’re just getting started with saving.
  • High-yield savings account: This type of account functions just like a traditional savings account, but offers much higher interest rates. At the same time, many require you to maintain a minimum balance and might charge account maintenance fees, which can eat into your returns. There’s often a minimum opening balance, too, so you’ll need to already have some funds accumulated before you can open an account.
  • Money market account: If you want higher rates and more liquidity, money market accounts can be a good place to keep your savings. Their interest rates are usually close to high-yield savings accounts, and, unlike savings accounts, they come with a limited number of checks and debit transactions a month. That makes it even easier to spend your money when you want to. Be aware that minimum balances and fees are common with these accounts.
  • Certificate of deposit (CD): Savings and money market accounts offer variable interest rates, so they could go up or down at any time. CDs, on the other hand, give you a fixed interest rate for a set term, usually between six months and six years. CDs often have interest rates as good as or better than high-yield savings accounts, but the trade-off is a lack of liquidity. If you withdraw your money before the term is over, you’ll generally lose some of the interest you’ve earned.

When to invest your money

Are you many years, or even decades, away from retirement, sending your kids to college, or putting a down payment on the house of your dreams? Do you have an emergency fund and enough money in savings for your short-term needs? Have you paid down any high interest debt? If so, it may be time to start investing your money. Investing is most likely to help you reach longer-term goals: things for which you need to build up a large amount of money, but you won’t need it any time soon. Consider investing when:

  • You don’t need the money within the next five years: Keeping your money in investments for at least five or ten years may lead to better returns in the end. Long-term investing, also known as a buy-and-hold strategy, is the idea that you hang onto assets long enough to ride out the inevitable ups and downs of the stock market.
  • Your employer offers 401(k) matching: Many employers will match your contributions dollar for dollar up to a certain percentage of your salary. It’s like free money for your retirement account. If your financial situation allows, invest at least as much as your employer will match so your retirement account grows more quickly.
  • You want tax advantages for retirement investments: The money you put into 401(k)s and traditional IRAs is pre-tax, meaning you don’t pay income tax until you withdraw it in retirement. Your contributions now are subtracted from your taxable income when you file your return, reducing your current tax burden.

Whether you’re a hands-on DIY investor, prefer working with a financial advisor, or enjoy the ease of an automated robo advisor, opening a brokerage account is the first step in your investment journey.

Saving vs. investing: strike the balance you need for financial security

Saving and investing aren’t mutually exclusive. Understanding how to use both strategies empowers you to work toward your goals in the short term and far-off future using the right types of accounts for what you want to achieve. Something saving and investing have in common: the sooner you start, the more time your money has to grow. Start finding your balance today.

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Sarah Spagnolo

Sarah Spagnolo serves as Managing Editor, Head of Brand at Stash, the investing app that helps people achieve their financial goals. As Managing Editor, Sarah oversees all personal finance content and brand experiences, ranging from partnerships to influencer marketing and webinars, and is the editor of the Stash 100, Stash’s annual collection of the best money tips for hardworking Americans. She has two decades of experience working in brand, communications, and content for companies across media, tech, travel, design, and finance. Over the course of her career, she has appeared as an on-air expert in outlets including The Today Show, Good Morning America, CNN, MSNBC, Dr. Oz, the Weather Channel, Cheddar, and many local news channels, and has been quoted in Axios, The Information, CoinDesk, the Wall Street Journal, and dozens more. A graduate of Syracuse University, she lives in Brooklyn with her husband and family.

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As an expert and enthusiast, I don't have personal experiences or expertise, but I can provide you with information on the concepts mentioned in the article you shared. Let's dive into the key points about saving and investing.

Saving vs. Investing: Key Differences

Saving and investing are distinct financial concepts that serve different purposes in a financial plan. Here are the key differences between saving and investing:

  1. Time Horizon: Saving is typically for short-term goals (5 years or less), while investing is for mid- to long-term goals (5+ years to several decades).
  2. Returns: Saving usually offers lower returns based on typical savings account interest rates, while investing has the potential for higher returns depending on asset and market performance.
  3. Liquidity: Saving is highly liquid, meaning you can easily access your money when needed. Investing is less liquid, with varying degrees of rigidity depending on the asset and account type.
  4. Risk: Saving is generally considered low-risk, while investing carries higher risk due to potential market fluctuations and other factors.
  5. Impact of Inflation: Saving may be impacted by inflation, as the interest earned on savings accounts may not keep up with inflation rates. Investing is often used as a hedge against inflation, as returns can outpace inflation over the long term.

When to Save and When to Invest

The decision to save or invest depends on your financial goals and time horizon. Here are some considerations:

  1. Short-term Goals: Saving is suitable for achieving short-term financial goals like vacations, car purchases, or building an emergency fund.
  2. Long-term Goals: Investing is more appropriate for achieving large goals in the distant future, such as college education expenses or retirement planning.
  3. Potential Returns: Investing has the potential for higher returns over the long term compared to saving in a traditional savings account.
  4. Emergency Funds: Saving is crucial for building an emergency fund to cover unexpected expenses or provide financial security during job loss.
  5. Risk Tolerance: Consider your risk tolerance when deciding between saving and investing. Saving is generally considered lower risk, while investing carries higher risk but also the potential for higher returns.

Impact of Inflation and Liquidity

Inflation and liquidity are important factors to consider when deciding between saving and investing:

  1. Inflation: Inflation erodes the purchasing power of money over time. Saving in accounts with low-interest rates may not keep up with inflation, while investing can potentially outpace inflation and generate higher returns.
  2. Liquidity: Saving accounts offer high liquidity, allowing easy access to funds. Investments are generally less liquid, with varying degrees of accessibility depending on the asset type and account restrictions.

Risks Involved in Saving and Investing

Both saving and investing carry certain risks:

  1. Saving Risks: Saving in low-interest accounts may not provide enough growth to keep up with inflation, potentially reducing future purchasing power.
  2. Investing Risks: Investing carries the risk of potential losses if the value of assets drops below the purchase price. Market volatility, business risks, and geopolitical factors can impact investment returns.
  3. Diversification: Diversifying your investment portfolio by spreading holdings across different asset classes can help manage risks.

Saving Options

Here are some common saving options:

  1. Traditional Savings Account: Offers low-interest rates but is accessible with low or no minimum balances or fees.
  2. High-Yield Savings Account: Provides higher interest rates but may require maintaining a minimum balance and charge account maintenance fees.
  3. Money Market Account: Offers higher rates and more liquidity than traditional savings accounts, with limited check and debit transactions.
  4. Certificate of Deposit (CD): Provides fixed interest rates for a set term, but lacks liquidity as early withdrawal may result in lost interest.

Investing Considerations

When considering investing, keep the following in mind:

  1. Time Horizon: Investing is suitable for longer-term goals (5+ years) to potentially benefit from market growth over time.
  2. Employer Matching: Take advantage of employer 401(k) matching contributions if available, as it can accelerate retirement savings.
  3. Tax Advantages: Retirement accounts like 401(k)s and traditional IRAs offer tax advantages, reducing current tax burdens.
  4. Brokerage Account: Opening a brokerage account is the first step in starting your investment journey, whether you prefer a DIY approach, working with a financial advisor, or using an automated robo-advisor.

Remember, it's important to assess your financial goals, risk tolerance, and time horizon when deciding between saving and investing. It's often beneficial to strike a balance between the two strategies to work towards your short-term and long-term financial aspirations.

I hope this information helps! Let me know if you have any further questions.

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