There’s been so many ideologies and schools of thought around saving and investing. One school of thought teaches that savings can make a man poor and that you can never save your way to wealth. While another school of thought opines that when you don’t save you’re likely never going to become wealthy.
The same school of thought advises that it’s good for a man to save and then invest. Whichever way, there’s always a role laying aside a fraction of your income pays in your journey to becoming wealthy.
Here in this article, we’re going to look at saving and investing; the difference between the two, and when best to do them.
Saving and Investing: what do they mean?
There is a distinction between saving and investing: Saving means putting money aside for later use in a secure location, such as a bank account. Investing entails taking a risk and purchasing assets that, in theory, will increase in value and provide you with more money than you put in overtime.
When you save money, you want it available quickly, possibly right away. Savings can also be used for long-term goals, such as ensuring you have money when you need it.
Savings accounts are typically low-risk. Those seeking the highest annual percentage yield (APY) savings account should look elsewhere (as long as they can meet the minimum balance requirements).
Comparable to saving, investing involves putting money away for the future, but with a higher return for taking on more risk. Stocks, bonds, mutual funds, and ETFs are typical investments (ETFs). To buy and sell them, you’ll need a broker or brokerage account.
If you want to invest money, you should plan to keep it for at least five years. Investments can be volatile and you can lose money on them. So only invest money you won’t need right away, preferably within a year or two.
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Is investing and saving similar?
Saving and investing have many differences, but they both help you accumulate money.
“First and foremost, both involve saving money for the future,” says financial expert and author Chris Hogan.
Both use specialized bank accounts to save money. Savers should open an account at a bank or credit union like Citibank. Investors must open an account with an independent broker, though many banks now offer brokerage services. Online brokerages like E-Trade and Charles Schwab are popular choices.
Saving money is important to both savers and investors. Before investing enormous sums of money in long-term investments, investors should have enough cash on hand to cover emergencies and other unexpected costs.
Investing, according to Hogan, is “leaving the money alone to grow for your dreams and future.”
Investing vs Saving
“People think saving and investing are the same thing,” says Dan Keady, CFP, chief financial planning strategist at TIAA.
While they have some similarities, saving and investing are very different. That starts with the assets in each account.
When saving, think of bank products like savings accounts, money markets, and CDs. Think stocks, ETFs, bonds, and mutual funds when investing, says Keady.
Savings: Pros and Cons
There are many reasons to save your hard-earned cash. For starters, it’s usually the safest bet and the best way to avoid losing money. It’s also simple and quick to access funds when needed.
Saving has the following advantages:
- Savings accounts state upfront how much interest you will earn.
- Savings accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation, so even if the returns are lower, you won’t lose money.
- Bank products are generally very liquid, meaning you can get your money quickly, though early withdrawals from CDs may incur a penalty.
- Fees are minimal. Savings accounts at FDIC-insured banks can only lose value due to maintenance fees or Regulation D violations (more than six withdrawals per month).
- Saving is generally simple. With no upfront costs or learning curves.
Saving has some drawbacks, including:
- It’s possible to earn more by investing, but it’s not guaranteed.
- Due to low returns, you may lose purchasing power as inflation eats away at your funds.
- Investing pros and cons
- Saving is safer than investing, but it will not result in the greatest wealth accumulation.
Investing: Pros and Cons
Investing your money has many advantages, including:
- Stocks, for example, can yield much higher returns than savings accounts and CDs. The S&P 500 stock index has historically returned around 10% annually, though returns can vary greatly from year to year.
- Product liquidity is generally high. Any weekday, stocks, bonds, and ETFs can be easily converted to cash.
- With a well-diversified stock portfolio, you can easily outpace inflation and increase your purchasing power. Currently, the Federal Reserve’s target inflation rate is 2%. If your return is less than inflation, you will lose purchasing power.
While higher returns are possible, investing has many disadvantages, including:
- Returns are not guaranteed, and the value of your assets may fluctuate, causing you to lose money.
- Depending on when you sell and the state of the economy, you may not get your money back.
- Keep your money in an investment account for at least five years to help you weather any short-term downturns. As a general rule, you should not touch your investments for as long as possible.
- Unless you have the time and skills to teach yourself, investing is a complex process that requires expert assistance.
- Brokerage fees can be higher. Trading a stock or fund may cost money, though many brokers now offer free trades. And you may need to pay a money manager.
So, saving or investing, which is better?
None is outrightly better than the other; the decision to save or invest depends on your current financial situation.
Generally, you should follow two rules of thumb:
A savings plan is usually best for short-term needs or as an emergency fund and usually, too, this is done in a savings account.
If you don’t need the money for five years or more and can afford some capital loss, you should invest it.
For example, your child’s college tuition should be saved in a savings account, money market account.
A year to buy a house? Maybe you should invest in the stock market, says Keady. “That’s more gambling than saving at that point.”
If you are keeping an emergency fund, you should never invest but save.
So if you get sick or lose your job, you don’t have to go back to debt. This is so you have money set aside to act as a buffer between you and life.
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When should you invest?
Investing is better for long-term money that you want to grow faster. Investing in the stock market, exchange-traded funds, or mutual funds may be an option depending on your risk tolerance.
You have more time to ride out the inevitable market ups and downs when you can keep your money in investments longer. Investing is ideal when you have a long time horizon (ideally years) and won’t need the money soon.
“If you’re just getting started with investing, I highly recommend growth-stock mutual funds,” Hogan advises. To truly grasp what is going on and how money can grow.
A beginner’s guide to investing is available. The first step is to learn more about investing and why it might be right for you.
Final words
Here’s a quick summary to help you make your choice: save for what’s around the corner and invest for the future.
Reference:
- Bankrate – Saving vs. investing: Here are the key differences for managing your money
- Investopedia- saving vs. Investing: What’s the Difference?
- Moneyhelper-What’s the difference between saving and investing my money?
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