Saving vs Investing – What’s the Difference?

Save for tomorrow. Invest in your future. That saying may sound repetitive, but it represents two very different ideas. Saving and investing play important roles in our financial health, and experts recommend doing a mix of both to build wealth. They each include setting money aside for future use, but that’s where the similarities end. 

There are many differences between saving and investing, and in my mind, the two most important are timing and liquidity. Some experts cite the risk/return tradeoff as a big difference that sets saving and investing apart. I’ll explore all three so that you can make your own determination on how to get started saving, investing, or both.

Saving is a relatively straightforward process where you set aside some amount of money toward a goal. Saving goals tend to be small or fixed, like establishing an emergency fund, building up a down payment for a car or house, or paying for a vacation or wedding. You can put your savings in variety of accounts, from a regular bank deposit account to an online high-yield savings account, which usually offers higher rates of return. 

Investing means dedicating money toward the purchase of assets that you expect will increase in value over time. The underlying goal here is growth. Investments tend to lock up larger amounts of money for longer periods of time. The value of these assets, like stocks or mutual funds, fluctuates over time, so investing for growth generally requires a longer-term view. Such investment goals may include funding your retirement, or college expenses for your children.

Three key differences between saving and investing relate to timing, liquidity, and risk:

Timing:

• Saving helps best with shorter-term goals or things that need to happen at a certain time. Some examples include a summer vacation, a special anniversary, or a certain home repair or upgrade. In these cases, the predictability and stability of savings better equip you to help reach the goal. Calculating in advance how much you need to put away at regular intervals also can help hit the number.
• Investing gives you the opportunity to benefit from a longer horizon. Compounding financial growth over time helps you ride out any short-term dips in asset values. Generally, investments are held for three to five years at a minimum. Many investing gurus suggest holding investments like stocks for decades.
  

Liquidity:

• Your savings are liquid funds, meaning that you can easily access them at any time. Unlike some investments, savings require no conversion and immediately can be received as cash. This is an important characteristic, especially in the case of emergency savings. 
• Investments have varying degrees of liquidity depending on the nature of the underlying asset. But, even the most liquid investment typically involves a process and some time to convert to cash. Many times, the process also includes a sales commission, withdrawal fee or penalty, which reduces the value. It also may not be a good idea to sell an asset on a particular day because of market fluctuations.
  

Risk/Return:

• Savings accounts come with low risk. Your money is practically guaranteed, but interest earnings are small. The Federal Deposit Insurance Company (FDIC), an independent agency of the U.S. government, protects depositors from loss up to $250,000 per qualified account/bank/and ownership category. It’s a good idea to ask your bank about FDIC insurance, because this can get complicated. The FDIC says that since 1933, no depositor has ever lost a penny of FDIC insured funds.¹ The tradeoff for this almost zero risk is low earnings potential.
• Investing is more of an open-ended, uncertain venture because you can never fully predict how much an investment will increase or decrease in value. For this reason, investment brokers and brokerage accounts have very clear disclaimers regarding the risks. That being said, common investment indicators, such as the Standard & Poor’s 500 Index, show 10% average annual returns since the stock market’s inception in 1926.² The more market growth an investment achieves, the less money of your own you need to contribute toward your goal.

Saving vs Investing