Saving Vs. Investing: Differences & When to Do Which
When trying to get your personal finances in order, you’ll be faced with the saving vs. investing dilemma sooner rather than later. If you are unsure of the difference between the two and are unfamiliar with the benefits of each, this could be troublesome.
To help you figure out the ins and outs of managing your money, we’ll discuss the differences between the two options, when to use each, and how to do it right.
What Are the Differences Between Saving and Investing?
Now, you’re probably already familiar with the terms, but let’s quickly define investing and saving: When you’re saving, you are essentially putting money aside, either to pay for something like car insurance, a down payment for a house, or initial expenses of starting a business, or just in case. Typically, people rely on savings accounts from financial institutions in this situation.
On the other hand, investing is all about making your extra money work for you. When you’re investing, you’re taking a risk in the hope that the investment will grow in value and you will end up with more than you started with.
Now, both of these are important ingredients for a healthy financial life, but they do not serve the same purpose. It’s important to know what to do with your extra funds; if your question is, “Is it better to save or invest?” we’ll first cover some basics of both to discover that.
When Should You Save?
Putting some money on the side for a rainy day has always been a good idea. Studies done over the course of the last year show that 71% of Americans have a savings account, and about 22% have between $1,000 to $5,000 in those.
If you’re living paycheck to paycheck, saving your money could be tough, and this number may seem a bit high. However, having an emergency fund is much more convenient than having to scramble for funds in an emergency. Having at least one month of living expenses set aside can help you get over some common financial struggles, such as urgent medical costs or other unexpected emergencies you might need to cover.
Saving is an excellent use of your money if you don’t have an emergency stash already. Calculating how much you’d need for a month and working toward that goal first is wise.
It is also an excellent first step if you are planning some major expenses in the future. This is the second definition of savings: saving upfront to make a down payment on your new place, for your new car, retirement, or your kids’ college. If those are your needs, having money ready will be much more beneficial than investing it and hoping it will increase in value by the time you need it.
What Are Your Saving Options?
Whether you’re putting money away for safekeeping or a significant purchase, there are many banking options for making cash saving as simple as possible. Of course, there is the traditional bank savings account. You can also opt for a savings account, which provides more competitive rates for saving that extra dough.
Since these online banks do not have to cover the brick-and-mortar banks’ expenses, they can pass some of the difference to you. If you are saving long-term, you should opt for some excellent, high-yield savings options available out there. These are also offered by online banks and allow your savings to increase at an enviable rate.
Lastly, if you are just getting into managing your finances, you might want to go with a cash account. These are essentially checking, savings, and investment accounts in one. Cash accounts typically don’t offer rates as astonishing as those offered by high-yield accounts. However, they are much more practical in terms of keeping track of your finances.
All in all, saving is an excellent option for those who don’t want to lock their money up, but rather keep it accessible at all times. It is also excellent for slowly growing your wealth, with minuscule risk involved compared to investing money.
When Should You Invest?
If you have a savings plan ready, you might consider putting the extra funds to work while you sleep. This is where an investment account can come in handy. It’s time to discuss the best ways to invest money.
Unlike savings accounts, which are very low-risk investments into your future, investing your money comes with a certain level of risk by default. On the flip side, you have a much better opportunity for high returns.
Investing is typically a good solution once you have saved enough for emergencies and paid off all your debts. It’s also an excellent opportunity for those planning in advance for significant expenses, such as retirement, or sending their babies to college. This is why we advise saving first and investing second. Your money investment won’t be nearly as liquid as it should be if you end up needing it for emergencies.
The other aspect of investing that you should be aware of is that, compared to savings, you’ll have to be a quick learner. You should do in-depth research on the type of investment options you are interested in and how to build a successful portfolio. You also need to understand the risks associated with high-return investments.
What Are Your Investment Options?
The world of investing has grown exponentially, especially recently. Luckily, that also means you have more than enough options to find something that would work for your financial goals. You can rely on tools and software to handle a large chunk of the work for you while you sit back, relax, and watch your money grow.
For example, investment beginners might benefit from robo-advisor apps. These ask you about your investment goals, the level of risk you are comfortable with, and how much you are looking to invest. Using these parameters, and an algorithm based on proven ways to invest money, the advisor then creates a diversified portfolio of investments for you. Once you are more comfortable investing and become more interested in stocks, you can switch to stock broker services to set things up.
Lastly, there are many excellent investment apps available. These can help you navigate this space and make it work for you even if you don’t have a lot to invest.
Even though the words “investment” and “savings” are often used interchangeably, they aren’t the same thing. There is a significant difference between saving and investing in terms of purpose, the risk associated, as well as the return amount you can expect between the options. Try to save for a rainy day first, and then invest the remaining portion of the money - that way, you’ll benefit from both worlds.
What are the disadvantages of savings?
While putting money aside for the future and not using it immediately is always a good thing, saving has a couple of disadvantages you should know about. First, you won’t get rich overnight in returns, even with high-yield savings accounts. Furthermore, your funds in a savings account can also fall victim to inflation, especially since the average returns are low.
What’s the 50/30/20 budget rule?
The 50/20/30 budget rule is meant to be an effortless system for saving and investing your money. According to Senator Elizabeth Warren, who popularised the rule in her book “All Your Worth: The Ultimate Lifetime Money Plan,” 50% of your after-tax budget should go toward what you need. You should put 30% toward what you want, and save the remaining 20%.
Is saving more important than investing?
This question has been the main one of the saving vs. investing debate for a while now. The answer depends entirely on your financial needs and opportunities, but generally speaking, it’s advisable to create and fill a savings account first, then focus on investing. If you already have a safety net in the form of an emergency fund, then your priority could be looking into high-return investment options.
Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.