What’s Better For You? Saving or Investing?

SHORT ANSWER: When you need your funds within a year, saving is the smarter choice. But when you are planning for long-term use cases, investing can help that money grow and keep pace with inflation.

Saving and investing both have their use cases and benefits. Using each wisely forms a smart financial plan. But you have to know how to maximize saving versus investing to see the big picture and prepare yourself for anything. Learn how to manage your finances by transitioning between saving and investing funds at various milestones to build a stable today and a vibrant tomorrow.

Understanding Saving vs. Investing

To start, take a look at the difference between saving and investing. Some people might think the terms are interchangeable or not understand the nuances of each. 

Saving is the process by which a person sets aside cash. Generally, that cash sits in low-risk environments, such as a standard savings account. With that low risk, the money is also likely to earn low returns. Some examples of where people place savings include savings accounts, money market accounts or certificates of deposit (CDs). In case of extreme circumstances, some people even hide cash in their homes for the fastest access to their savings.

Money placed in these account types is liquid, meaning it can be withdrawn anytime to be used within minutes or a day. That way, the money can cover the person for unforeseen circumstances, such as a job loss or major expense. While it offers minimal rewards, it serves the purpose of ensuring stability in the moment.

In contrast, investing is money held in high-risk, high-reward situations. Some common financial vehicles for investing include exchange-traded funds (EFTs), real estate, stocks and bonds.

People might hold these assets in a variety of account types, including retirement plans, brokerage accounts or college savings plans. Investments aim to provide returns or growth for the investor. That way, they can grow their wealth in the long term. Those funds are rarely liquid like savings. Getting out of those investments at the wrong time to cover a surprise expense could be costly or lead to delays that could impact your finances.

Saving vs. Investing: Pros and Cons

As you plan where to put your funds – investing versus saving – consider the pros and cons of each.

Saving vs. Investing: Key Similarities and Differences

The largest similarity between saving and investing is that they both ensure you have funds outside your normal monthly expenses. In both cases, you’re setting aside money to plan for the future. How far in the future, how dependable the returns are and many other factors differ between the two strategies.

For most people, the question isn’t whether to have a saving or investing account. It’s how to balance the use of both and decide how much to place in each account to manage long and short-term needs.

To provide a greater perspective on the differences between the financial options, review this comparison.

How to Choose Between Saving vs. Investing

Choosing between saving and investing comes down to evaluating many factors based on your finances.

1. Timeline for when you’ll need the funds: Look at when you plan to use the funds. For example, you might know you’ll purchase a new vehicle in five years. In that case, you have enough time to choose a stable investment option that will grow to help ensure your buying power is the same in five years as it is now. But you need low-risk investments. 

In contrast, your timeline might be indefinite, such as in the case of your emergency fund. That money needs to be on hand in case of the unexpected at any point. So a high-yield savings account might be better for it. Generally speaking, when you need to access the money in 12 months or less, saving is better than investing. But when you have a year or more before you need the money, investing it can help it grow. 

1. Risk tolerance: Investing is significantly riskier than saving. While some investment vehicles are lower risk, they don’t carry the same security of placing funds in a bank account and knowing they will have the same value tomorrow as they do today. With investing, you could lose your initial investment and even earnings from that investment if something goes wrong. 

Even when you have some time before you need the money, the risk might be too great to invest it. For example, your job situation might be unstable. Or you’re renting a living space that has an unpredictable future and want to know you’ll have a down payment on a home or first month’s rent at hand easily. In those cases, it’s safest to place the funds in a savings account.

1. Be sure you’re setting long-term goals: Look carefully at your financial goals. Don’t just think about your goals for a year from now. Look at the long-term, such as when you’ll need to replace a vehicle — even if your vehicle is fairly new. Consider whether you or someone who depends on you will go to college in the next 10-15 years. 

Don’t forget retirement. Most people plan to retire between the ages of 60 and 70. Make sure you’re putting away adequate funds to prepare for that. Short-term goals might include a trip or a new smartphone. How far into the future your goals are will impact where you place your funds. 

Should You Save or Invest?

Now that you are well informed about the use cases and factors that inform saving and investing, here’s a clear course of action for when to do each. Just know that maximizing each will provide the best financial scenario.

When to Save Money

Here’s when you should save money in a low-risk situation, even though it will provide minimal returns.

• When you’ll need the funds in the next year, placing them in a high-yield savings account or short-term CD is better than investing the funds, which you could stand to lose in that timeframe.
• If you have no emergency fund, you want to spend some time building that up so that you have liquid funds in case of an emergency. Most experts recommend having enough in an emergency fund to cover six months of expenses.
• People with high-interest debt should focus on paying that down before investing. Failing to do so first could mean you pay more in interest on that debt than you earn from investing.

When to Invest Money

Investing your money can help you build wealth over time when done in the right scenarios. Here’s a look at when to place your funds in investments instead of savings.

• In use cases when you won’t need the funds for a few years, investing can provide higher yields on the funds.
• When you can assume greater risk, investing can also provide greater reward. You should be comfortable losing some of the funds or you might make emotional decisions, which cost you in your investing journey.
• Employees eligible for employer matching in 401(k) accounts can maximize their retirement savings when they invest more in their 401(k). You don’t want to leave money on the table. Max out your employer matching before considering savings for as long as you can.

Maximizing the Benefits of Both Saving and Investing

You should not be asking whether you should save or invest. You should be looking at how to balance your contributions to each to maximize their benefits. Follow these tips and guidelines for when to place money in each financial strategy to get the greatest benefits from your money with the liquidity you need to live comfortably.

Frequently Asked Questions