Saving and Investing. What’s the Difference and Which is Right for You?
What’s the difference between saving and investing? The terms get used interchangeably sometimes but they’re not the same and knowing the difference between the two will help you plan for the future more effectively.
Both saving and investing are important because they set aside money now for use in the future. How far in the future, what the money is for, where you keep the money, and how much you can expect it to grow (or shrink) are where the differences come in.
Saving is better for short term goals like an emergency fund or upcoming vacation. You’ll need access to the money soon, you’re not really concerned about how much the money grows over time, and keeping it stashed in a savings or checking account is appropriate. Savings prioritizes quick access to your money and making sure it doesn’t lose any value over having it grow over time. Savings are best kept in an FDIC insured account (like a bank savings or checking account) where you can get to the money quickly if you need it, and there’s basically no chance your money will lose value. The tradeoff for those advantages is that the interest rates you’ll receive on your money will probably be 1% – 2% at best.
Investing on the other hand is better for long term goals; like retirement or college for your kids. You don’t need access to the money as soon so your priorities are different. You want your money to grow (a 1% return in a savings account for retirement isn’t going to cut it.) Investing means putting your money into something with the potential to gain value over time; stocks, bonds, mutual funds, etc. With that potential for growth comes risk – the potential for it to lose value for some of the period as well. Investing can be done in a 401(k) or IRA for retirement, a 529 plan for college, or a regular brokerage account. Each has its own advantages and disadvantages and where you invest can matter almost as much as what you invest in come tax time.
There’s no clear line where saving stops and investing begins. The important thing is to match up your goals for the money with where you keep it; balancing immediate access and safety with potential for a higher return.