What Is the Difference Between Saving and Investing?
Growing up, many of us are told of the importance of saving. “A penny saved is a penny earned” is more than an empty adage. It highlights the fact that saving is an essential form of financial security — though you’ll need quite a few pennies to protect yourself against any unexpected expenses.
On the other hand, it can be hard to read headlines about the stock market without feeling that you are missing out. Putting some money into your investment portfolio is surely a wise decision as well, right?
Doing either can be difficult. Saving money can feel pointless. Why save when you can make your money work for you? On the other hand, investing your money carries some risk, and doing so can make your capital inaccessible until your investment opportunity matures. What will you do if an emergency occurs and your savings account is dry?
Should you focus on saving or investing? To answer this question, we’ll need to reel the conversation back a bit. First, you’ll need to learn the purposes of saving and investing. While they are both ways to accumulate money and prepare for your financial future, there are many differences between the two.
If you want to accumulate wealth, you’ll need to understand these differences in order to determine when and how much you should put into savings or investments. Read on to learn more about these differences and determine what you need to do to ensure a prosperous future.
Table of Contents
What Is Saving Money?
You’ve likely been tempted by something you’d like to buy at the mall. You might reach for your wallet, pull out a couple of bills, and — put them right back into your wallet. After thinking about it, you’d rather not spend your money right now.
Congrats, you’ve saved money! Right?
Not quite. Saving money in a structured and organized way involves placing earned income into a savings account. There are many different types of savings accounts, so it’s important to know what to look for.
An ideal savings account is certified by the Federal Deposit Insurance Corporation (FDIC), which typically means the money is insured up to $250,000. Banks are not required to be insured by the FDIC, so be wary. Some other factors you’ll want in your savings account include:
- A high annual percentage yield;
- No annual or monthly fees;
- No limits on withdrawals;
- Any additional bonus incentives.
Setting up a savings account is easy. After researching banks and finding one that offers a savings account that meets your needs, get your driver’s license and Social Security number, then apply. This can be done in-person or online. If you want to link your new account to your current checking account, be sure to have that account’s routing and account numbers on hand. Note that you’ll need a minimum amount to open the account, and this can vary by bank. Contact them ahead of time to determine the amount you’ll need.
Benefits of Saving Money
Saving is necessary to building your financial stability and accumulating wealth. Saving a small amount of money each month will help you accumulate wealth — this can be used to develop a sense of financial security, eventually make major purchases, and potentially make investments down the road. Further, you’ll earn interest for the money in your savings account, helping you accumulate wealth more quickly.
What Is an Investment?
An investment is a monetary asset that will not yield an immediate effect but will at a later date. Investing capital is more difficult than saving, and wise investments require some research. Regardless of your skill level, however, investments always carry some level of risk. This risk can be minimized by doing thorough research and consulting a financial advisor.
Traditionally, investments are designed for long-term returns, but there are a wide array of short-term investments as well, and some are more conventional than others. Some examples include:
- Government and corporate bonds;
- Real estate;
- Certificates of deposit;
Benefits of Investing
Investments offer a wide range of financial opportunities. Whether you’re interested in ways to earn a slow-but-sure ROI, or you want to take on more risk for potential high-yield returns, there are options that are sure to meet your needs. The only way to see true financial growth is by developing an investment portfolio. The more diverse your portfolio is, the more assured your future financial growth will be.
Should You Save or Invest?
As you may have surmised by this point, the dilemma between saving or investing isn’t about whether you should exclusively save or invest; it’s about determining when you should save and when you should invest. Both are essential when it comes to financial security and growing wealth.
When Saving Is Best
The best time to start saving is now. In the bustle of daily life, it can seem hard to begin setting money aside, particularly if your living expenses are high. However, procrastinating on building your savings can become a persistent habit — and you won’t grow financially until you can develop a reasonable amount of savings.
A good rule of thumb is to save enough money to cover at least six months of expenses. This includes rent, utilities, groceries, gas, and any other goods or services that you cannot do without. Once you have this amount in your savings account, you’re ready to begin considering investments and grow your wealth further.
When Investing Is Best
One of the main ways people begin to invest is through retirement accounts. By extension, planning adequately for retirement almost always requires some form of investing — although it can be difficult to think this long-term when you are still dealing with upfront expenses. You can’t invest money until you’ve saved some.
However, you should be exploring your investment opportunities early on, far before you intend to pull the trigger on them. By knowing precisely where and how your money will be invested, you’ll be better equipped to save the proper amount each month to eventually make those decisions.
You don’t actually want to commit to investments until you’ve thoroughly analyzed each opportunity. Taking a value investment approach will ensure you are equipped with enough information to maximize your investment potential. When you have enough money and information to carefully take on some risk, you’re ready to invest.
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