Would you like to know the perks and drawbacks investing versus saving? You are on the right article. So, relax as we take through!
Although investing and saving are both important, they are not the same thing. This is because while both can help you achieve a more comfortable financial future, you need to know the differences and when it’s best to invest and when it’s best to save.
One major difference between investing and saving is the level of risk taken. Investing allows you to earn a higher return, but you take on the risk of loss to do so. Whereas, saving allows you to earn a lower return but with virtually no risk.
Undoubtedly, it’s all up to you to decide whether investing or saving is the better choice to reach your financial goals. But, one is better than the other for certain goals.
Even if you have been working on your finances for years or you’re just getting started, it is sometimes difficult to know when you should be investing and when you should be saving.
Most times it is tempting to want to invest to receive higher returns and beat inflation. But the value of your investments won’t always go up. This said you might want to consider saving as a safer route because the money in your bank account won’t typically decrease unless you withdraw funds. But interest rates on savings accounts do not allow your money to grow very quickly. Also, interest rates are often lower than the rate of inflation. This is to say that your savings could lose purchasing power over time.
Now, how do you know when you should stick to the safer path and save. And when to risk more to earn bigger returns and invest?
Let’s get you started…
Investing Versus Saving
Saving is putting away money for a future need or expense. Though saving can also be used for long-term goals especially when you want to be sure you have the money at the right time in the future. People deposit money in a low-risk bank account.
Investing on the other hand is quite similar to saving. Reason being that you’re putting away money for the future, except you’re looking to achieve a higher return in exchange for taking on a higher risk.
If you plan to invest money, you should also plan to keep your funds in the investment for at least three to five years. This is because investments can be very volatile over short periods, and you can lose money on them. This is why we recommend you only invest money that you won’t need immediately, within a year or two.
Some key differences between investing versus saving are displayed in the table below:
|Return||Relatively low||Typically, higher or lower|
|Risk||Virtually none||This varies by investment, but there is always the possibility of losing some or all of your investment capital|
|Typical products||Savings accounts, money-market accounts, CDs||Stocks, mutual funds, bonds, and ETFs|
|Time Horizon||Short||Long; 3-5 years or even more|
|Protection against inflation||A little||A lot|
|Expensive?||No||Could be expensive. Depending on how much you buy, trade, and create taxable gains|
|Liquidity||High, except CDs||High, you may not get the exact though|
How Are They Similar?
As seen from the table above, investing versus saving have many differences in their features, but they share one common goal: which is that they both help you accumulate money.
Firstly, both involve putting money away for future reasons. Both make use of specialized accounts with a financial institution to accumulate money. For savers, it’s opening an account at a bank or credit union. For investors, it means opening an account with an independent broker such as Charles Schwab, Fidelity, and TD Ameritrade.
Investors and savers alike realize the importance of having money saved.
How Are They Different?
When you use the words saving and investing, over 90 percent of people, think it’s the same thing. Dan Keady, Chief financial planning strategist at TIAA, a financial services organization says.
While they both share some similarities, investing and saving are different in most aspects. And this begins with the type of assets in each account.
When you think of investing you think of stocks, ETFs, bonds, and mutual funds. And when you think of saving you think of bank products such as savings accounts, money markets, and Certificates of deposit–CDs, Dan Keady also says.
Pros And Cons Of Investing Versus Saving
|Amount in your accounts won’t decrease||Purchasing power could be lost due to inflation|
|If you save the proper amount, you can safely rely on reaching your goals on a set timeline||You have to save more money to reach the same goal while you can earn higher returns with investments|
|You may not have to contribute as much money to reach your goals due to higher returns||If your investments decrease in value before you reach your goal, you may have to delay a goal|
|Typically, has higher returns than saving||Your investments could decrease in value|
The Perks And Drawbacks Of Saving
There are plenty of reasons you should be saving your money. For one, it’s the best way to avoid losing any cash along the way. It’s usually your safest bet. You can access the funds quickly when you need them and it’s also easy to do
Saving comes with these benefits:
- A savings account tells you how much interest you’ll earn on your balance.
- The Federal Deposit Insurance Corporation–FDIC guarantees bank accounts up to 250,000 USD. This means that, while the returns are lower, you are not likely to lose any money when using a savings account.
- You can get your money as soon as you need it because bank products are generally very liquid. Though if you want to access a CD before its maturation date you may incur a penalty.
- Minimal fees. The only way a savings account at an FDIC-insured bank can lose value is through maintenance fees or Regulation D violation fees (when more than six certain transactions are made out of a savings account)
- Saving is generally straightforward. There isn’t any upfront cost or learning curve.
Saving does have some drawbacks despite its perks. These include:
- Low returns. This means you could earn more by investing. (However, there are no guarantees)
- You may lose purchasing power over time. As inflation eats at your money.
The Perks And Drawbacks Of Investing
Investing is a riskier move than saving, though it may not mean the most money in the long run.
Below are a few of the benefits that investing your cash can come with:
- Investing in products such as stocks can have higher returns than savings accounts and CDs.
- Investing in products can be extremely liquid. Bonds, stocks, and ETFs can easily be converted into cash on almost any weekday.
- If you own a broadly diversified collection of stocks, then you’re likely to easily increase your purchasing power and beat inflation over time. Presently, the target inflation rate that the Federal Reserve uses is 2%. So if your return is below the inflation rate, you are losing purchasing power over time.
Just like in saving, investing also has quite a few drawbacks. These include:
- Returns are not guaranteed. There’s a chance you could lose money as the value of your assets fluctuates in the short term.
- You may not get back what you put into the investment depending on when you sell and the overall economy.
- So that you can ride out any short-term down-drafts you will want to let your money stay in an investment account for at least three years. You can not access your money because you will want to hold your investments as long as possible.
- You will probably need some expert help you with investing because investing can be complex.— unless you have the skill-set and time to teach yourself how.
- Fees are higher in brokerage accounts. You will often have to pay to trade a fund or stock. And you may also need to pay an expert to manage your money.
Now, Which Is Better – Investing Or Saving?
We can’t outrightly say which is better than the other, because each one depends on your current financial position.
Though, you will probably want to follow these two rules of thumb:
- If you want to use the funds as an emergency fund or you need the money within a year or so then a CD or savings account is a better fit.
- But if you don’t need the money for the next three years or more and can withstand a complete loss, then you should probably invest the money.
Keady says real-life examples are the best way to illustrate this. For example, paying a tuition fee in a few months should be in savings — a savings account, a short term CD, or a money market account.
‘So if you have, a job loss, an illness or whatever, you don’t have to resort back to debt,’ Hogan says. ‘You have got the money you have intentionally set aside to be a cushion between you and life’.
When Is Investing Best?
Investing is better for longer-term money. That is, the money you are trying to grow more extremely… Depending on your level of risk tolerance, investing in exchange-traded funds, mutual funds or the stock market may be an option for you. That is if you are looking to invest.
Investing is an excellent choice when you have a long time horizon and won’t need to access the money anytime soon.
Although investing can be complex, there are easy ways to get started. The first step is learning more about investing and also why it could be the right step for your financial future.
The information above is just a guide on investing versus saving. The decision to make when it comes to investing versus saving, all depends on your choice.