Why Saving Is Not Enough for Growing Money
Learn how investments can help you grow money for the future, while savings accounts can help you keep money on hand.
By Karen Lynch | American Express Credit Intel Freelance Contributor
5 Min Read | February 1, 2022 in Money
To save or to invest, that is the question. You might think you’d find the answer in things you have no control over, like stock market volatility or inflation. While those certainly matter, the real answer to how you should best grow your money depends on you: your financial situation, time horizon, tolerance for risk, and goals for the future. And you may choose to both save and invest, for different reasons.
But let’s assume that you can afford to invest some money in stocks and bonds, that you’ll be able to endure any stock market dips, and that your goal is to grow your money over several years – maybe for retirement. That’s where investments have typically outperformed savings accounts over the years.
Let’s look at how investments have stacked up against savings accounts in the past, and how they might grow your money.
Saving is one way to be sure you have the money you need on hand now. Most savings options:
- Pay low interest rates.
- Involve next to no risk.
- Make it easy to access your money without having to pay transaction fees or trade assets during a downturn.
Traditional savings accounts, high yield savings accounts, and money market accounts all have these three things in common. The other commonplace savings account, a Certificate of Deposit (CD), is a little different: It does require you to park your money and leave it there for one month to five years, often in return for a slightly higher interest rate.
If you’re looking to grow your money, however, the drawback with all of these options has to do with inflation. Even at a low inflation rate of around 1%, inflation can undermine your return on savings and maybe even erode the money you put into your savings in the first place. So while savings accounts can help you put money aside for next year’s wedding or a rainy day, they don’t often deliver much toward the goal of growing your money.
Investing comes in many more varieties, most of which can deliver higher returns on your investment if you can handle greater risk and hold onto your investments for a while. For example, here’s the potential difference in growth between a $1,000 deposit and a $1,000 investment:
Growth Difference on a $1,000 Deposit & Investment
|Savings Option||10 Years Later
|Savings account with 0.25%-1% interest, compounded daily, before taxes||$1,025-$1,105*|
|Investment Option||10 Years Later|
|Moderate-risk investment portfolio of stocks and bonds, before taxes||$1,853-$2,782**|
Some, such as mutual fund investments, are popular because they offer a straightforward way to invest in portfolios of stocks, bonds, or other financial assets. Even simpler are exchange-traded funds (ETFs), which are also portfolios of financial assets but are traded like a stock. Yet another straightforward investment option might be an index fund that tracks a particular stock market. Even with these relatively simple investments, though, the categories can seem almost limitless, among big, medium, and small company stocks; domestic or international stocks or bonds; tech sector or health care sector shares; corporate or municipal bonds; or other options. To learn more, read “Different Types of Equity Mutual Funds.”
To cut through any confusion, many investors rely on financial advisors. Financial advice can also help determine how you invest over time – for example, “dollar-cost averaging,” which is a strategy to invest on a regular basis as the market rises and falls, smoothing out the cost of your investment purchases. Or you could direct some of your assets into retirement accounts, for tax advantages. Taxes are often a consideration, if you do grow your money. So are fees charged for financial advice, transactions, and portfolio management.
Between the variety of assets and the volatility of stock and bond markets, it’s natural to see a wide range of returns on investment, including the possibility that the value of your investment could fall. An indication of why people invest anyway is that the S&P 500, a stock market index, has risen from just over 130 points in 1980 to over 4,600 points in January 2022.1 Certainly, it has dropped in some years, but the trend is it rebounds and continues climbing.
With the kind of diversified portfolio that is often advised for investing, a 50-50 mix of stocks and bonds has delivered an average 8.7% annual return from 1926 to 2020, according to one of the big mutual fund companies.2 But it had losses in 20 of those 95 years – which is why investing is a long-term game compared with savings. A higher growth-oriented mix of 80% stocks and 20% bonds delivered 9.8%, on average, with losses in 24 years.
Whatever your choice – which could certainly change over time along with your life goals – many financial advisors say to start investing early so you gain the benefits of compounding interest. That’s what happens when you reinvest your earnings from one year so that the earnings themselves make money in the years that follow, producing a snowball effect. The younger you are, the more time you have for compounding to work its magic.
Saving and investing each have potential benefits and downsides, but for growing your money, most financial advisors agree that investing usually works best. The recommended approach includes investing only what you can afford, staying calm during market volatility, and investing for the long term.