Saving vs. Investing: An Overview
The words “saving” and “investing” are sometimes used interchangeably, but when it comes right down to it, we should be engaged in both to secure our financial future.
A shared characteristic of both saving and investing is the utmost importance that they play in our lives. If you are not doing either, the time to get started is now. This may require changes in spending, tracking, and in the utilization of your income, but it can and should be built into your plan. A general rule of thumb is saving should be short term while investing should be long term. Keeping that in mind, let’s review the differences. Also, keep in mind for both saving and investing that when risk goes down, liquidity goes up and vice versa.
- Saving money typically means it is available when we need it and it has a low risk of losing value.
- Investing typically carries a long-term horizon, such as our children’s college fund or retirement.
- The biggest and most influential difference between saving and investing is risk.
We save for purchases and emergencies. Saving money typically means it is available when we need it and it has a low risk of losing value. It is important to track your savings, putting a deadline, or timeline, and a value to your goals. For example, if you are saving for your annual family vacation, you might want to target $3,000 to save in nine months to withdraw at the end of the year. You then know how much you need, how much to save monthly, and the ability to take the money out without fees to spend on that treasured vacation.
When investing, it is important to invest wisely. You will have a better return if you begin investing early. Understanding different investment vehicles, what they are for, and how to use them is imperative to being successful. We invest for long term goals, such as our children’s college fund or retirement. We use specific vehicles that allow for growth. If our children have 10-plus years before they go to college, we can invest monthly in a vehicle like an education savings account (ESA) or a 529 plan. These allow for withdrawals when your child goes to college. Long-term college plans can help you successfully reach that goal.
To start, the biggest and most influential difference between saving and investing is risk. You save when you put money into a savings account like a money market account or Certificate of Deposit (CD). It has little risk of loss of funds but also has minimal gains. When you save, you are usually able to pull that money out when you need it (or after a period of time). When you invest, you have the potential for better long term gains or rewards, but also the potential for loss.
You risk more in investing for a larger return, but your potential loss can be large as well. It is important to review your goals to figure out which option is best for each one, saving or investing. Done incorrectly could cost you a lot of money in fees or loss of potential income earned through investing.
Another difference is interest, or money made. In investing, we want our investments to make us money, while the goal of saving is to keep our money safe, making very little return.
A certificate of deposit (CD) is a popular savings tool. This tool is can be relatively short term, ranging from a few months to many (7 or more) years. While in the CD, your money is safe and grows at a slightly bigger interest rate than in a regular savings account, but accessing it before the term of the CD is over could mean paying fees and penalties.
It is possible to be a wonderful investor, have growth in your 401(k), and have investment properties, but be unable to make ends meet because you do not understand how to save your short term funds. You can save money each month, but long term, those savings will not pay in retirement and most likely will not pay for your children's college, making investing equally important. This should remind us how important both are, especially when done together.
Generally speaking, short term is under 7 years and long term is over 7 years, but when it comes to saving and investing, those figures are based more on the specifics of the goal. Keep in mind when you will need funds, what your plan is for the funds, and the safety/risk associated with the goal.
In the end, do not wait to save or invest. Time is the greatest opportunity to grow your money and to meet your goals. With a relatively small amount of money, you can start investing and saving and get on the path to reaching all of your financial goals.