What's The Difference Between Saving And Investing?
Nov 12, 2022 By Triston Martin

However, while saving and investing is crucial to establishing a stable financial future, they serve different purposes. While saving and investing may help you secure a more secure financial future, consumers should be aware of the distinctions between the two.

The degree of risk assumed distinguishes investing from saving. Saving is the way to receive a lesser return with almost no chance. However, investment presents the possibility of a more significant recovery in exchange for the risk of a smaller return.

How Are Saving And Investing Similar?

While there are numerous distinctions between saving and investing, they both have the same purpose: to help you build wealth. According to Chris Hogan, financial guru, and author of Retire Inspired, "first and foremost, both require putting money away for future purposes." Both can open dedicated savings account at a bank.

That entails opening a savings account at a financial institution like Citibank or a credit union. Traditionally, this has meant opening an account with an independent brokerage firm; however, many banks now provide brokerage services these days.

Both savers and investors understand the value of having a nest egg. Before tying up a sizable sum of money in long-term investments, savers should ensure they have an adequate emergency reserve.

What's The Distinction Between Saving And Investing?

According to Dan Keady, CFP, chief financial planning strategist at TIAA, "when you use the phrases saving and investing, folks — actually 90 percent or so — assume it's precisely the same thing."

Although the two activities share similarities, saving and investing are very different. And the first step in doing so is identifying the assets held in each account.

The Benefits And Drawbacks of Saving

There is a plethora of justifications for your prudent financial planning. It's the easiest method to keep your money in your pocket and the safest gamble you can make. It's simple to set up, and you can get your hands on the money as soon as needed. In sum, here are some advantages of saving:

  • An individual's interest rate on a savings account is disclosed upfront.
  • While the profits on a savings account are minor, your money is safe since the Federal Deposit Insurance Corporation insures deposits up to $250,000.
  • Money invested in most bank products is readily available when needed, albeit early withdrawal from a certificate of deposit may result in a penalty.
  • Minimal costs are incurred. The only ways a savings account at an FDIC-insured bank might lose value are maintenance fees or Regulation D violation costs.

Investing: Benefits and Risks

The risk of losing money when saving is far lower than when investing, yet saving will likely not lead to the most significant accumulation of wealth.

Some of the upsides to putting your money to work are listed below.

  • Stocks, for example, can offer substantially better returns than savings accounts or certificates of deposit. Returns on the stocks comprising the Standard & Poor's 500 indexes (S&P 500) have averaged around 10% yearly over the long term, despite wide variations from one year to the next.
  • The majority of investment options are highly liquid. The value of stocks, bonds, and exchange-traded funds (ETFs) may be quickly and inexpensively liquidated into cash practically every business day.
  • Over the long term, you’re buying power will improve if you invest in a diverse portfolio of equities since your returns will be higher than inflation. Although the Federal Reserve has set its target inflation rate at 2%, actual inflation has been significantly higher in recent months and stubbornly high for the last year.

What's Better, Saving Or Investing?

Whether you should prioritize saving or investing depends on your unique financial situation.

Money-Saving Opportunities

  • A high-yield savings account or money market fund is your best bet if you expect to need the money within the next few years.
  • Before investing, you should have an emergency fund in place. The standard recommendation for an emergency fund is three to six months of living costs.
  • Paying off high-interest debt, such as a credit card balance, should come before putting money into the stock market. It is more probable that you will get a greater return on your money by paying off a debt with an annual interest rate in the high teens than by investing.

How To Invest

  • Investing may be a better option than saving if you can wait at least five years before using the money and can handle some level of uncertainty.
  • Your employer may supplement your 401(k), or other retirement savings account if you are qualified for a match (k).
  • You may increase your wealth over time via investing if you have an established emergency reserve and no high-interest debt. If you want to save enough money for retirement, you must start investing now.