5 Min Read | April 1, 2022
Saving and investing are two different ways to achieve financial goals. Understanding the differences can help you choose the best approach for you.
Saving and investing are two approaches to setting money aside for future goals.
Saving tends to be better suited for smaller goals with definitive values and time frames.
Investing is a tradeoff: it takes on greater risk in return for potentially greater earnings, in pursuit of large, long-term goals.
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:
Saving vs Investing
|Timing||1-3 years||5+ years|
|Liquidity||Immediate access||Access takes time|
|Risk||Low||Various – medium to high|
Common ways to save money include bank savings accounts, high-yield savings accounts, money market accounts and Certificates of Deposit (CDs). Some savings accounts don’t generate interest, and those that do may offer rates below the rate of inflation. Others may require minimum balances or charge fees. Annual percentage yield (APY) is a good tool to compare the earning potential of different savings accounts. To learn more, read “The Differences Between APR, APY, and Interest Rates.”
Investments most often occur through brokerage accounts, which let you buy and sell individual stocks, mutual funds, bonds, and various other types of investments. Different fees and costs are associated with such accounts, depending on the degree of service they offer. For clarification, when banks offer brokerage accounts, they’re not FDIC insured.
Saving and investing are two distinct methods for shoring up your financial position and building wealth. Saving carries low risk and fits neatly into shorter-term goals. Investing is longer-term and presents greater risk – along with the potential for greater reward. It’s important to match the right method to your goal. Most experts recommend that you start doing both as soon as you are able.
1 “Understanding Deposit Insurance,” FDIC
2 “What is the average annual return for the S&P 500?” Investopedia
Kristina Russo is a CPA and MBA with over 20 years of business experience in firms of all sizes and across several industries, including media and publishing, entertainment, retail, and manufacturing.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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