What is the Difference Between Saving and Investing?

Saving and investing are two feathers from the same bird; they are very similar but have important differences. You will likely need both to achieve your financial goals

Saving is the act of setting funds aside from income earned somewhere safe for future use, such as emergencies, and short-term goals.

Investing is the act of using your money to buy assets, such as stock, bonds or real estate with the goal of increasing your wealth over time, usually with a goal of growth, generating income, or beating inflation. Investing has the potential to return more than savings over time but has a longer-term objective and carries more risk.

Saving is a good strategy for funds that you want to access quickly and with no risk to the principal saved.  In most cases, savings accounts through banking institutions are insured against loss by Federal Deposit Insurance Corporation (FDIC) up to a point.  You can typically withdraw funds from a savings account without penalty at any point.  Always consult with your advisor or institution regarding the ins and outs of the deposit products being offered.

The primary risk with short term deposit accounts is that the yield or Interest earned doesn’t keep pace with the average cost of living, and if too much is left for too long, you can lose buying power over time.

Savings accounts and similar deposit accounts can be effective tools to keep emergency funds out of your day-to-day transaction accounts and are also a good tool to use for funding a short-term financial goal that you plan to fund mostly yourself and are not relying on interest or appreciation contributing much to the goal.

Short-term deposits may fund goals such as car down payment, vacation money, home improvements, and emergency funds.  You might consider institutions such as banks, credit unions, or lower risk short-term investments in a brokerage account.  Products might include savings accounts, interest earning checking accounts, money markets, Certificates of Deposit, US Treasury Bills and Saving Bonds.

Investing is a strategy for longer term goals where you expect to earn returns on your assets over time.  Typically, more than you could earn with a savings account.  Investments may give you a leg up by potentially providing better returns than you could get by just saving. 

The primary risk with investing is volatility.  Investments such as stocks, bonds and mutual funds are tied to financial markets, and values may go up and down along with changes in the economy, or industry invested in.

Investing can be a good approach when you are working towards a longer-term goal, and you need returns to contribute significantly more than you could make by just saving.

You might consider investments for retirement planning, college costs, down payment for a house or vacation home, starting a business, and leaving a financial legacy to your family.

There are many ways to invest, with a wide range of risk levels.  The most common ways to invest include stocks, bonds, mutual funds, exchange traded funds, real estate and real estate investment trusts.

A diversified approach to finances is usually best, and a combination of saving and investing is typically the way to go.  Be sure to connect with your trusted advisor to further understand the pros and cons of saving and investing to choose the mix that is right for you.

Category: Investing