Many people use the terms saving and investing interchangeably. However, important distinctions exist between these two financial concepts. Understanding the key differences empowers you to make smarter choices when building wealth. This guide examines saving versus investing – when to do each and how to balance both appropriately.
Table of Contents
Defining Savings
Savings refers to money, typically cash, set aside for short-term goals or emergencies. Savings accounts and cash equivalents like money market funds are common vehicles for accumulating savings.
Key attributes of savings:
- Low risk
- High liquidity – can access funds immediately
- Modest or no returns
- Used for near-term expenses
Savings provide stability and prepare you for unexpected costs. A healthy emergency fund should cover 3-6 months of living expenses.
Defining Investing
Investing means putting money into assets like stocks, bonds, real estate, or businesses with the goal of generating higher returns over time. Investors accept greater risk in exchange for appreciation and income potential.
Investments feature:
- Higher risk depending on asset classes
- Less liquidity – selling may take days to months
- Potential for greater returns over long term
- Used for longer-term goals like retirement
Investing creates wealth but requires accepting short-term volatility.
Key Differences Between Saving and Investing
Purpose
Savings provide stability for the present. Investments aim to build wealth for the future.
Time Horizon
Savings are accessible in the near term. Investments are locked up longer term.
Risk Level
Savings entail minimal risk. Investing involves risk of loss.
Return
Savings deliver modest interest. Investments offer higher growth potential.
Tax Treatment
Savings interest is taxed. Many investments enjoy tax-advantages.
Management Effort
Savings only require depositing money. Investing takes continual research and rebalancing.
When to Save Versus Invest
Save for:
- Emergencies – 3-6+ months of living expenses
- Planned near-term purchases – car, home downpayment
- Major upcoming expenses – medical bills, tuition
- Peace of mind and stability now
Invest for:
- Long-term goals – retirement, college fund
- Building wealth over decades
- Generating higher returns to improve your financial position
- Funding future living expenses when not working
Striking the Right Balance
Aim to do both simultaneously:
- Build a robust emergency fund with enough savings to cover urgent expenses.
- Consistently invest money not needed in the near term to grow wealth for later.
- Treat savings and investing as separate pools of money with distinct purposes.
- When savings exceed 6 months of living costs, invest excess rather than just accumulating more savings.
- Replenish savings immediately if withdrawn to handle emergencies.
Sample Savings and Investment Allocation by Age
In Your 20s:
- 50-80% in savings accounts
- 20-50% in investments like Roth IRA
In Your 30s:
- 30-50% in savings
- 50-70% in investments
In Your 40s:
- 20-30% in savings
- 70-80% in investments
In Your 50s and 60s:
- 10-20% in savings
- 80-90% in investments
Adjust percentages based on your financial situation. As you accumulate more wealth, shift allocation from savings toward investing over time.
Frequently Asked Questions
Is it better to pay off debt or start investing?
Generally pay off high interest credit card and loan debt first before investing. But consider investing if debt interest rates are low.
How much of my income should I save versus invest?
Aim to save 5-20% in savings, and invest at least 10-20% toward retirement and long-term goals.
Which is riskier – saving or investing?
Savings in FDIC insured accounts have zero risk of loss. Investing always carries some risk, especially for volatile assets like stocks.
Can’t I just use savings as an investment and earn interest?
Savings interest is very low, around 0.5% annually now. Investing returns exceed inflation over time while savings don’t.
What’s the minimum needed to start investing?
Many online brokers now offer $0 minimums. You can start investing with just small amounts of $100 or less in some cases.
How often should I rebalance savings versus investments?
Review savings occasionally but keep fairly stable. Rebalance investments at least every 1-2 years to match your target allocation.
Distinguishing between saving and investing helps optimize both and maximize your ability to achieve diverse financial goals over time. Use savings for stability today while investing for wealth tomorrow.
** This is not financial advice. Please do your own research.
