Saving and investing are two important ways to manage your money and make it work for you. But these two strategies have big differences, such as the returns they provide, account protections and tax benefits they may offer. Whether you’re putting a little cash aside for a rainy day or looking to grow your wealth for the long haul, understanding these concepts may mean the difference between financial struggle and financial stability in the future.
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What Is Saving?
Saving is the act of setting money aside and making sure it’s accessible for short-term goals or unexpected expenses. You may set that money aside in a traditional savings account, a high-yield savings account or even a piggy bank or safe.
Your savings account could help with car or home repairs, unexpected medical expenses, job loss and other scenarios. Savings can provide a figurative safety net when you fall financially.
What Is Investing?
Investing is the process of buying assets in hopes that the value of those assets will increase over time. These may be traditional assets like stocks and bonds or alternative assets like art and cryptocurrency.
Investing is typically a long-term process. The more time you give the assets you purchase to grow in value, the higher your returns will likely be. However, that means it’s unwise to tap into your investment accounts to cover surprise expenses.
Instead, long-term investments are most commonly used to save money for retirement or for large foreseeable expenses, like the down payment on a home or a college fund.
Saving vs. Investing
When comparing saving and investing side by side, some of the biggest differences include returns, types of accounts, goals, time, contributions and tax benefits.
The average savings account pays a 0.33% APY. So while these are relatively safe places to store your money, you’re not going to earn much. High-yield savings accounts typically offer returns around 2.35%, or even a little higher. That’s much better than a traditional savings account.
Unfortunately, you’ll find returns on savings don’t hold a candle to investing. The stock market generates an average return of more than 11% per year. The median return on real estate investments in the United States is about 8.6%.
When it comes to returns on capital, investing is a clear winner.
There are also differences in the protections afforded to the different types of accounts you can invest and save in. A savings account is typically FDIC-insured to a minimum of $250,000. If the bank were to go underwater financially, the FDIC would cover the losses in your account on a dollar-for-dollar basis up to $250,000.
When you invest, you accept the risk of loss as FDIC insurance is non-existent. Instead, the SIPC covers investment accounts. The SIPC protects a brokerage’s clients if that brokerage becomes bankrupt.
A savings account is meant to cover you in financial hardship. Most experts suggest that you should have between three to six months of income in your savings account at all times. Once you achieve that limit, you should invest excess funds.
Investing, on the other hand, doesn’t have a cap on contribution goals. The typical goal of investing is to provide the best retirement possible. So you’re able to add to your investments for a lifetime with no capped contribution goals.
Savings has a relatively short time horizon. It’s important that you build your safety net as quickly as possible. And if you use the money in that net, it’s important to rebuild your savings as quickly as possible. Whereas investing is a long-term activity.
Savings may offer a form of fast-paced gratification. You feel the fruits of your labor as the worries of the financial world wash away. While investing doesn’t involve any short-term gratification, it has unmatched long-term benefits.
There is no tax benefit to putting money in a traditional savings account with the exception of healthcare savings accounts.
However, many investment accounts offer tax advantages. These include retirement accounts like IRAs and 401(k)s as well as custodial accounts designed for minor children.
There are several differences between saving and investing, but the truth is that everyone should be doing both. Now that you know the differences, take the time to start increasing your financial stability by building your savings account and investing portfolio.
FAQHere are the answers to some of the most frequently asked questions about saving vs. investing.
- Why is saving better than investing?
- Neither savings nor investing is better than the other. They're both essential tools as you develop your long-term financial stability.
- What are the differences between saving and investing?
- The biggest differences between saving and investing include the reasons you take part in these activities, the returns each provides and the protections offered by each type of account.
- How much of your salary should you save vs. invest?
- Most financial experts suggest that you should have between three and six months' worth of income in your savings account. Experts also suggest that you should invest between 15% and 25% of your income.
Information is accurate as of Feb. 8, 2023.