Saving vs. Investing

Many people use the terms saving and investing interchangeably, but they are not the same. While both involve setting money aside for the future, they serve different purposes and come with unique benefits and risks. Understanding the difference between saving vs. investing is essential in making informed financial decisions that align with your financial goals.  

Saving refers to the putting aside of money for future use. Most people generally save with a particular goal in mind — whether that be paying off a car, buying a house, or contributing to emergency funds. While saving can be carried out over a longer period of time, it is usually done to reach short-term goals.Investing refers to the purchasing of assets with the intent to grow your money over time.

Investment products are usually purchased with the expectation that your money will grow over an extended period of time. In turn, investing is expected to result in higher earnings over time compared to traditional savings accounts — but at the cost of higher risks. Because investments, such as stocks, bonds, and so on, are tied to financial markets, your account values may experience volatile increases and decreases following changes in the economy. Therefore, higher returns are never a guarantee and, in fact, your investments could lose money.

Before diving deeper into the differences between saving money vs. investing, we will look at the different financial accounts and products available for saving and investing. 

When saving or  investing, it may help to use some sort of financial account, product, or asset for storing your money. Saving and investing both offer various different options.

Saving money is commonly done through a traditional savings account at a bank, but there are several other options to consider. Some popular choices include: 

• Bank or credit union savings accounts — Standard savings accounts that offer easy access to funds with minimal risks.

• Money market accounts — A hybrid of savings and checking accounts that may offer competitive interest rates, with limited transaction capabilities.

• High-yield savings accounts — Online, or specialized, accounts that provide higher interest rates than traditional savings accounts.

• Certificates of deposit (CDs) — Fixed-term deposits that typically offer higher interest rates, in exchange for keeping funds locked in for a set period of time.

While savings accounts provide a secure place to store your money, interest rates can vary depending on the financial institution and account type. Learning how to save money, and finding an account to best fit your needs, doesn’t have to be overwhelming. Raisin offers access to multiple high-yield savings accounts so you can find the best interest rates available. Explore accounts and see how much you could be earning today.

There are many financial products or assets available for investing. Some of the most common investment options include: 

• Stocks: Shares of a company that can appreciate in value.

• Exchange-traded funds (ETFs): Funds that track an index or sector, offering diversified exposure. 

• Bonds: Fixed-income securities that provide regular interest payments and may be lower risk than other investment options.

• Mutual funds: Professionally managed portfolios that provide regular interest payments, and may also be a lower risk investment option. 

• Real estate: Property investments that can generate rental income and can appreciate in value over time. 

Unlike traditional savings accounts, investing has the potential to offer higher returns, but also carries the risk of potential losses. To start investing, you may need a brokerage account. Investing can be challenging for beginners. Research, patience, and an understanding of market trends would be wise before making any financial commitments. 

Understanding the main differences between saving vs. investing money is crucial when deciding how to manage your money. While both strategies help you build financial security, they serve different purposes and come with varying levels of risk and reward.

One of the most significant distinctions between saving and investing is risk. In general, the risk of loss of principal in a savings account is extremely low. There is a higher chance your money will remain secure in a savings account. Investing, however, always carries the possibility of losing some, or all, of your capital. This varies from investment to investment, but the risk is always present. While higher risk often comes with the potential for greater returns, investment gains are never fully guaranteed.

The timeframe for saving and investing also differs. Savings are typically used for short-term goals, such as an emergency fund or big purchases in the near future. Investing, on the other hand, is generally a long-term strategy — often five years or more — with the goal to build wealth over time.

Saving is relatively straightforward, and can be done through various financial products like savings accounts, CDs, or money market accounts. Investing, however, may be more difficult because it requires more research and financial knowledge, as it involves selecting stocks, ETFs, bonds, or mutual funds that potentially align with your financial goals.

While these are some significant distinctions between saving vs. investing money, both strategies play a crucial role in financial planning. Having a better understanding of when and how to use each approach may help you make more informed decisions that support your long-term financial success.

There are plenty of reasons for wanting to save or invest your hard-earned money. But what are some of the pros and cons of saving vs. investing? We have put together this chart to help you better compare the two. 

Saving and investing are both options that can play a role in potentially reaching your financial goals. If you are having a hard time deciding whether to save or invest, you might want to look at your financial situation, financial goals, and potential risk tolerance, in order to create a financial plan. Creating a financial plan to suit your needs can help you to make better financial decisions and contribute to your financial security and wealth management.

Creating a financial plan will help you draw up a roadmap tailored to your financial situation and help potentially reach your goals. Therefore, apart from analyzing your current financial status, which may include your income, expenses, debts, and assets, it is also crucial to look at your long-term and short-term financial goals.

• Short-term goals

Short-term goals, such as saving for a vacation, an emergency, or for a down payment on a car, are typically meant to be achieved in a few years. Due to the shorter time constraints, safety and liquidity may be of higher priority when making short-term goals, since you will most likely want to ensure that your funds are easily accessible when they are needed.

• Long-term goals

Long-term financial goals, such as saving for retirement, college funds, or building generational wealth, are usually made with the intent to stretch five years or longer. This may allow your money to have a higher return. Long-term goals can offer the possibility to fluctuate with the market and potentially help build your wealth. Once you have an understanding of your personal long-term and short-term goals, you can decide how much money you can allocate into your savings, investments, or both. It is also important to look at the time-frame of your financial goals, as this may influence which strategy you choose. As saving tends to cater towards shorter-term goals, and investing tends to cater to longer-term financial growth and goals, it is important to determine your highest priority and potential risks you may face when saving or investing.

In general, most people benefit from a diversified approach of managing their finances by both saving and investing. While individual reasons for saving or investing may be different, balancing the two can help contribute to financial stability and growth. Savings are important for providing a safety net for potential unexpected expenses and for reaching short-term financial goals, without having to risk principal losses. This may be particularly important for those in the earlier stages of their career who need liquidity. However, younger individuals may also be more comfortable with riskier investments for long-term growth, as they have more time to recover from market fluctuations. As financial stability increases, shifting toward investing may become a bigger focus to help build long-term wealth.

Age and risk tolerance may also play a bigger role in your decision to save or invest. Since financial goals also change with age, you may experience gradual shifts in your financial plans depending on what stage of your life you are in. Younger people tend to focus on short-term goals, but with age this may shift towards focusing on retirement or preserving capital. Risk tolerance may also influence how you want to save or invest, as individuals with a lower risk tolerance may prefer to choose the safer option to save, in order to mitigate possible losses.

In the end, a well-managed balance, or diversification, of saving and investing may help build your wealth and protect you and your family against financial uncertainties. It is important to understand the benefits and downsides to both saving and investing, while also reviewing and adjusting your finances and goals. Doing so can help adapt to life changes, evolving financial goals and economic shifts, while focusing on a comprehensive approach to your personal wealth management. This can also help you to develop your own saving and investment strategy.  It is crucial that you are well-informed before making any decision on where to store your funds.

Savings and investments may help you maintain a healthy financial plan. Understanding the specific roles and benefits of saving money vs. investing may help guide your financial strategy to help meet your goals. Whether you are safeguarding against emergency expenses, or saving for retirement, it is important to look into different options to see what may best fit your needs.

Getting started with saving doesn’t have to be daunting. Raisin offers plenty of savings options designed to help grow your money and potentially hit your financial goals. Explore which type of account best fits your needs and start optimizing your savings today!

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

Sources

¹ https://www.usatoday.com/story/money/2024/05/26/credit-report-errors-what-to-do/73816078007/