You want to make responsible choices with your money. It seems like a good idea to put money aside to save for a rainy day. But you also don’t want to lose out on opportunities to grow your money over time by investing. So which one should you choose: saving or investing?
Saving vs. investing isn’t really an either-or question, but a question of your money’s purpose. Saving and investing are both important financial moves that meet different needs and help you fulfill unique financial goals. This article looks at the key differences between saving and investing and how to decide whether (and how much) to save vs. invest.
Erika Taught Me
- The decision of saving vs. investing requires you to consider your money’s purpose.
- Save money when you need it to be easily accessible and not lose value.
- Invest your money when you want to earn higher returns on it and plan on letting the funds grow for many years.
Differences between saving and investing
Although some people use the words saving and investing interchangeably, there are some definite differences.
Saving is about setting aside a portion of income for short-term goals and emergencies. Its purpose is to provide a safety net for unexpected expenses. Investing, on the other hand, is about generating returns over the long run, generally through stocks, bonds, or real estate.
Both are great ways to ensure your financial security, but you do need to know when to choose saving and when to choose investing.
| Saving | Investing | |
| Risk level | Typically none | Potentially high |
| Time horizon | <5 years | 5+ years |
| Rate of return | Low | Potentially higher |
| Types of products | Savings accounts, CDs, money market accounts | Stocks, mutual funds, ETFs |
Both saving and investing are important — you generally need to do both in a balanced way to build a successful financial life.
Saving or Investing: When should you save?
Saving is the best choice when putting money aside for expenses that you’ll need to cover within a shorter time frame — usually less than five years. This can include major upcoming expenses, such as putting a down payment on a house or car. It also includes money you’ll inevitably need when emergencies crop up.
There are multiple different types of bank accounts for saving. While you can put money aside in a traditional savings account, you may get slightly better interest rates by putting savings in a money market account, high-yield savings account, or a certificate of deposit (CD).
Everyone should have an emergency fund, first and foremost. This is a bank account dedicated to emergency savings. It’s best to prioritize this type of fund even before investing at all because you never know when emergency expenses will strike. The vast majority of financial experts recommend a cushion of three to six months’ worth of funds to cover living expenses in case of job loss or other financial catastrophe.
For those with an unpredictable income, you may be better off building up a larger cushion of nine to 12 months’ worth of expenses. Freelancers and seasonal contractors can rest easier after preparing for periods of low or no income.
Above and beyond an emergency fund, it’s wise to save in low-risk ways for events that are likely to occur within a few years. That goes for both emergencies and expenses for happier things such as holiday gifts or travel.
Saving or Investing: When should you invest?
Investing is often associated with retirement, and while a retirement account is a major part of the goal, you can generally focus on investing any funds you don’t plan on touching for at least five years. Investing in stocks and bonds comes with greater risk, so you need a longer runway of time to make up potential losses.
You should create an investment account when you have a full emergency fund to cushion you in case of a financial upset.
Consider your debt picture before investing a lot of your income. For those with high-interest debt or large debt balances, it may be best to prioritize debt payoff over investing — especially if your debt is costing you more in interest than the expected rate of return on investments.
You can invest when you have time to take risks. This means that if you’re anywhere from five years to several decades from retirement, you can probably afford to put money into investments knowing they may lose money, but should gain value over a long period of time. Invest in the stock market via an employer-sponsored retirement account, like a 401(k) or 403(b), especially if you’re eligible for any level of employer matching.
For some near-future expenses you would normally count as “savings,” it can be fine to invest in pursuit of greater returns. Be sure the type of account allows you to access the funds quickly, easily, and without penalty.
Pros and cons of savings
Whenever you’re deciding what to do with the money you don’t need to pay the bills, saving is often a great option. But you need to ask yourself a few questions about your goals for this money and consider the pros and cons of savings.
Saving or Investing: Pros of saving
- Safe and insured: Savings accounts are safe vehicles for your money. There’s a guarantee on your money in FDIC-insured banks that protects up to $250,000 per account type, per depositor.
- Quick access: You can quickly access funds in a savings account to cover emergencies as well as expected expenses. There may be a penalty for cashing out a CD before maturity, but at least the money’s available. Everyone needs access to money to cover surprise costs like a burst heat pump, a broken car transmission, or a sudden trip to urgent care.
- Funding major expenses over time: Whether it’s a cross-country trip three years from now or a wedding in six months, having “buckets” within a savings account can make those large expenses more manageable because you’ve deliberately saved the money to cover them.
- Simplicity: You don’t need a ton of financial expertise; just check several financial institutions for their benefits and services, and you can get started. It’s low-risk and easy.
Saving or Investing: Cons of saving
- Low returns: You generally won’t make a large rate of return with a savings account. Although some banks offer high-yield savings accounts with APYs as high as 5%, it’s still lower than most people can potentially make if they invest money long-term.
- Lost purchasing power: While it’s crucial to keep a certain amount in savings for emergencies, you don’t want to overload your savings at the expense of investments, which may keep up better with inflation.
Check out our list of the best high-yield savings accounts.
Pros and cons of investing
Just as saving money has its pros and cons, there are pros and cons to investing.
Saving or Investing: Pros of investing
- Potentially higher returns: Despite market volatility, if you invest over many years, you have a better chance of your overall returns averaging out higher than those of your savings.
- Growing wealth for long-term goals: You have a shot at growing your wealth for many years into the future when you invest rather than merely save. Investing is good for long-term goals like retirement or a child’s higher education tuition.
- Diversified risk: Despite the higher level of risk when you invest, the vast range of investment options means you can diversify. Diversification spreads out your risk so that over the decades, you protect yourself from losing too much in any one sector or type of investment.
Saving or Investing: Cons of investing
- No guaranteed returns: A big downside of investing is that your money isn’t guaranteed to increase in value, and in fact, it can lose value. Investment accounts aren’t covered by FDIC insurance, so you have to accept that investing is inherently riskier.
- Less accessible: While some investment accounts are accessible, it doesn’t mean you should access them. Investments are best left invested for longer periods of time — ideally, a minimum of five years to be worth investing rather than saving. And of course, the younger you are, the longer you should leave your money invested (and the more risk you can take on).
- More hands-on: One thing to be aware of with investing is that it has a steeper learning curve than saving. Being an expert is certainly not required, but it’s wise to do some research into basic investment types and products before diving in.
- Fees: Investing can involve various fees, such as high fees from brokerage accounts. However, with a bit of research, you can find lower-cost ways of investing.
FAQs
Is it better to save or invest?
Neither saving nor investing is superior; it depends on what you need this money to do. A basic rule of thumb is that saving is better for short-term needs, and investing is better for long-term growth and wealth.
For example, if you’re expecting to replace a vehicle within two years, you may want to save money in a safer product like a high-yield savings account, so you can avoid having to borrow money when it’s time to buy. But if you’re thinking far into your future, investing is generally the way to go.
How much money should I keep in savings?
Most experts agree that an emergency fund of three to six months’ worth of expenses (not income) is a good benchmark. This helps provide a financial buffer in the event of your job being downsized out of existence, a sudden illness, or damage to your home. However, a bigger cushion of up to a year’s worth of expenses is great, especially if your income is sporadic or you anticipate a longer period of unemployment.
Some people also like to save for multiple specific future costs. Often called “sinking funds,” these are earmarked for planned expenses like holiday gifts, a child’s wedding, a new car or appliances, and the like. The amount you save in each will vary depending on your circumstances and wishes.
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