What's the Difference Between Saving and Investing?
As you start planning, think of saving as a means to get to something specific in the near future. Look at investing to help you reach your long-term goals.
You just got a big bonus at work. Congratulations! Should you save or invest it?
Confession, you may be thinking, I don’t know the difference between saving and investing.
No judgment, future saver and investor! These terms aren’t always clear-cut, and people often confuse “saving” for “investing” in conversation. So while investing is a form of saving, their differences are important to understand.
Let’s get right to it.
What’s the Difference Between Saving and Investing?
Think of saving and investing as two ways your money can help you plan and prepare for your future.
Saving is putting money aside for a rainy day, like with a savings account at a bank or squirreled away under a mattress. (Note that we don’t recommend that approach.) Your personal savings are easily accessible if you need them in an emergency or to cover planned expenses, like a trip. In a traditional savings account at a bank or credit union, your money earns interest and is federally insured.
To learn more about the different ways you can save, check out our Saving for Beginners blog post.
Investing is a longer-term approach to grow your wealth over your lifetime and plan for financial freedom. When you invest, you buy an ownership stake in a public business, also known as buying stock or shares. Your ownership makes you a shareholder in that business.
If you want to learn more about the ways you can invest, check out our Investing for Beginners blog post.
Compared to traditional savings accounts, investing can potentially result in strong returns, meaning the value of your money can increase. But keep in mind that, with investing, you’re taking on more risk than a traditional savings account and you may lose or gain money based on market performance. With sound risk management, you can put together a diversified portfolio that may minimize risk and volatility.
So, as you start planning, you can think of saving as a means to get to something specific in the near future, and you can look at investing to help you reach your long-term goals. For example, saving could give you enough cash on hand to buy a new smart fridge early next year, while investing could enable you to put a down payment on your dream home in 10 years.
Additionally, when it comes to saving and investing, it’s important to consider inflation and how it will impact your money over the coming years.
What is Inflation?
Simply put, inflation means that, as time passes, your money doesn’t go as far as it did before.
Thirty years ago, for example, white bread cost $0.61 per pound. If you tried to purchase bread with just $0.61 today, it probably wouldn’t even get you a slice, much less a pound. The increasing everyday cost of living shows how inflation can work over time to decrease your purchasing power and overall net worth.
So, when looking at your savings and investments, your goal is to keep pace with or outperform inflation. Because savings accounts tend to have low interest rates, they’re typically not sufficient to grow your money over time. As we mentioned, they’re great to address short-term goals and emergencies. But to plan ahead, investments will help you address inflation while also potentially growing your wealth.
Should I Save or Invest?
It’s a good idea to have an emergency fund savings account for unexpected expenses or changes, like a job layoff. It reduces your reliance on credit cards or having to take out a high-interest loan. We recommend having at least three months’ worth of expenses in your emergency fund, but if that goal is too lofty, don’t stress. The aim is just to get started.
Once your emergency fund is set up, the way you then save and invest is up to you and the methods will be different for everyone. Your saving and investment strategy will be unique to you and your specific goals. The portfolio of a parent with young children, for example, may look markedly different from the portfolio of a single woman who wants to take a gap year and travel the world.
Take a minute and think of that hypothetical bonus we mentioned earlier, and whether to save or invest it. Think, too, of your current finances and any big dreams you have for the coming years. Then, with your ideas in mind, consider:
- What are you saving for?
- How much money do you have to get started?
- How much time do you have ahead of you?
- What’s your risk tolerance?
The aim is to create a mix of savings and investments in your portfolio that will help you move toward the life you want, while also matching or outpacing inflation.
Why Should I Start Saving and Investing?
When your wealth grows thanks to your saving and investments, you gain financial freedom and flexibility. Having money saved and invested can be the difference between buying a home or continuing to rent, or retiring at 60 compared to 70.
Remember: Savvy savers and investors are made, not born, and everyone has to start somewhere. The more you know, the more you’re able to plan. The more you plan, the more prepared you’ll be.
Investing with COIN can provide more return on your money than savings alone.*
*Investments are not FDIC insured – No Bank Guarantee – May Lose Value. Investing involves risk, including loss of principal, and past performance does not guarantee future results. Diversified portfolios and asset allocation do not guarantee profit or protect against loss.