Feb 10, 2022
Saving vs Investing: Exploring Key Differences
Saving and investing are different—and each serves a unique purpose in a financial plan. When you learn the distinction, you can plan with more confidence.
Saving and investing are distinct financial concepts. While they both involve putting money toward the goal of increasing your assets in the future, they have very different functions.
So what exactly is the difference between saving and investment? In short, saving usually involves setting aside money for a specific financial goal—often a short-term one like buying a new car—or an emergency fund. Investing, on the other hand, is a long-term strategy in which you seek to get a return (that is, you want your money to grow over time).
Despite their differences, both saving and investing require putting money aside and planning for your future. So as you’re deciding how to approach your own financial planning, consider the different functions of saving and investing in relation to your goals.
Saving: rainy days, emergencies, and big purchases
When you put together a budget, the first order of business is usually to make sure you can cover your basic expenses—things like rent, groceries, and monthly student loan payments. You also want to make sure you make room in your budget for things you want, like going out to dinner. If you have money left over, that’s money you can save.
Savings are usually for specific, short-term financial goals—like a vacation or a new phone. You might also save for bigger-ticket items, like a new car, a home, or college tuition. Another example of when you might go with savings vs. investing is to build up a rainy day fund or an emergency fund to help you stay afloat financially when life hands out surprises—from emergency car repairs to getting by if you’re laid off.
Investing: money working for the long term
Investing, in contrast, means putting your money to work to earn a return. That is, you want your money to grow over the long term—and you want it to grow faster than inflation. Investing in the stock market generally means purchasing an asset: usually a stock, bond, or fund.
One of the main differences between savings and investments is that people generally invest with the hope of earning more money over time than they would if they put the same amount of money in a savings account. While investments vary greatly in their rates of return, this article offers some information about different types of investments and their historical performance.
The difference between saving and investing risks
People often compare what they see as the safety of saving vs. investing’s risks—but it’s not quite that simple. It’s true that when you put your money in a savings account, it’s considered fairly safe; typically the Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 in a bank deposit account. But there are still risks and downsides to savings.
For example, savings accounts usually offer relatively low interest rates—potentially lower than the rate of inflation. If you stash your money in the bank for an extended period of time, the future value of your nest egg may be whittled away by inflation. Some banks also charge fees, which can eat into your balance.
On the other hand, investing comes with the risk that your portfolio could lose value. With stocks, the company could fail to create revenue, miss production deadlines, or have a bad quarter—all of which could push the value of the stock down. If you’ve invested in bonds, they could lose value if interest rates or inflation rise, or if the company or government defaults on the debt. The stock market can also see-saw on a daily basis—and, with it, the value of your assets.
The value of your investments can also change when rules and regulations change—depending on whether those regulations make it either easier or more difficult to conduct business, among other things. There are methods for curbing your risk, such as diversifying your portfolio, but no investment is entirely free of risk.
Savings and investment: the relationship is key
Ultimately, growing your money isn’t just about savings vs. investment, it’s balancing saving and investment. Many people have both a savings account and an investment portfolio. After all, they serve separate purposes and have distinct risks and benefits.
By understanding the difference between savings and investment, you can apply that knowledge to find the balance that best meets your short- and long-term financial goals. Stash can help you get there.