Saving and investing are both methods for setting money aside to shape the financial future you want.
While both play critical roles in helping you build your long-term wealth, it’s important to recognize the differences between saving vs investing so you can determine when it’s best to save and when it’s best to invest.
Typically, when you’re saving money you’re adding it to a specific type of account that you can then withdraw funds from at a later date in order to finance your lifestyle or items that add to your lifestyle.
Investing, on the other hand, is focused on growing your money. Unlike a savings account, an investment portfolio can help you learn how to make passive income and build wealth that will sustain you later in life.
To break it down even further, essentially, saving is your first step in forming good financial habits and having money to put toward investing once you’re ready.
But in order to grow your wealth for your future—for things like retirement, vacations, education, kids, etc.—you need to learn to invest in wonderful companies.
Here, I’ll cover the pros and cons of saving vs investing, why you need to do both, and how much to save vs invest depending on where you’re at in your financial journey.
Let’s dive in.
How Are Saving and Investing Similar?
Saving and investing come together at the intersection of making your money work for you. In the broadest sense, they’re similar because they both revolve around the same goal of putting money aside to enhance the quality of your financial future.
Plus, each method can require involvement from a third party or financial institution so you don’t need to go on this financial journey alone.
When opening or managing a savings account, typically you work with a local bank or financial institution to determine the best type of account for your specific needs.
And, especially if you’re new to investing, there are also ways that you can work with a financial advisor on strategies that will help optimize and grow your investments.
Mutual funds are good if you want to take a hands-off approach to your investments and pay someone to manage your portfolio, but I don’t always recommend them.
Instead, if you have experience in the investing space, I advise that you manage them yourself and seek additional guidance only when necessary.
How Are Saving and Investing Different?
Many people mistakenly believe saving and investing are one and the same, but this is far from the truth. There are a few key differences between them that must be addressed to enhance your understanding of each and which one is the right fit for your current financial situation.
The key difference between saving vs investing is that saving stores your money while investing grows it. Doing both is not just good, but essential.
Having a safe place to store your money, i.e., in a savings account, ensures it’s there for you in case of an emergency, to be used for regular big purchases, or until you’re ready to invest.
Another big difference between saving vs investing is the perceived risk. With saving, there is somewhat little to no risk of having less than you started with… but I’ll get into that more in a bit.
With investing, there is a risk that you’ll lose some or all of your initial investment.
On the flip side, there is little to no chance that you’ll make any money off of your savings account, but, if you invest wisely, there is a good chance you will make money off of your investments.
And the last major difference between the two has to do with the assets that are being dealt with.
When we talk about savings, in most cases we are referring to money or currency that is being held in an account for safe-keeping. For instance, savings accounts, money market accounts, and certificates of deposit are all examples of savings methods.
On the other hand, investments function differently. When you choose to invest, you’re committing to back a company, product, or service with a specific amount of money because you deem it valuable.
Therefore, the assets that we discuss when we talk about investments can include stocks, ETFs, bonds, mutual funds, and more.
When to Save Money
Before you even think about investing, make sure to start saving. This should be the first action you take when you begin to evaluate your long-term financial goals. If you’re unsure of when is the right time to save money, consider each one of the following scenarios a sign to do so.
If You Need Cash Soon
If you foresee that you need money to cover various expenses over the course of the next few years, it’s best to start saving now so you can hit your short-term goals. These milestones could include anything from buying a car to putting down a deposit on a house.
In scenarios like these, having funds set aside in a savings account that you can easily withdraw for substantial purchases is ideal.
If You Don’t Have an Emergency Fund
Let’s be honest. Life happens, and it happens quickly.
Moving, large bills and layoffs are just some of the few things that can take us by surprise when we don’t have a plan in place for managing the financial costs of each of these events.
However, building an emergency fund is one of the best actions to take in order to protect yourself when the unexpected occurs.
Ideally, most emergency funds contain enough money to cover about three to six months’ worth of essential living expenses—housing, bills, food, etc.—that you can use in case your normal income stream is disrupted for any reason.
Before you begin investing, it’s crucial to set up an emergency fund that will give you peace of mind in knowing you can navigate some of life’s biggest and most unexpected financial setbacks.
If You Have High-Interest Debt
High-interest debt is one of the biggest roadblocks to building wealth, so if you have any, it’s best to address it by paying it down as quickly as you can.
Eliminate credit card debts or loans with high-interest rates before investing because doing so will give you a better return than you could achieve with an investment at this time anyway.
Attack your debt and then start investing to get more bang for your buck.
When to Invest Money
Once you’ve established a set amount of savings that you can fall back on in case of an emergency, it’s time to start investing so you can achieve your long-term financial goals.
Use the following situations as a guideline for evaluating whether or not you should begin investing.
If You Don’t Need the Money Right Away
If you don’t need the money for at least five years, investing is the route to take. Playing the long game is key.
In order to get the best returns on investments, you must be patient and understand that the longer you wait, the more opportunities there will be for your money to grow and support your wealth over time.
If You’re Saving for Retirement
If you’re eligible for a retirement account with your company or are considering signing up for one separately, a 401k account is an investment worth pursuing.
As one of the best long-term investment strategies, these accounts can prove to be particularly beneficial if your employer offers a match percentage based on your contribution amount.
For example, if your employer matches up to 3% of your contribution toward your retirement account each pay period, you should ensure that you’re contributing at least 3%. Otherwise, you’re leaving free money on the table.
If You Want to Build Generational Wealth
If you’re searching for the smartest way to grow wealth and make passive income that you and your loved ones can rely on for years to come, look no further than investing.
Building generational wealth is so much easier once you decide to test new strategies to grow your wealth instead of simply storing it in a separate account.
Strategies for Saving Money
Managing your money can be difficult no matter whether you struggle to bring in enough money or end up spending it faster than it comes in.
For these reasons, it’s important to focus on the best ways to save money right now so that you always have funds set aside no matter what life may throw at you.
Test out these tried and true strategies for saving money the next time you’re looking to increase your financial cushion.
Identify and Set Attainable Goals
Before you get ahead of yourself, sit down and really ask yourself what an achievable savings goal would be.
As with any kind of resolution, we tend to bite off more than we can chew and this deters us from sticking with the goal that we initially set. The same concept applies to saving money.
When thinking about your savings goals, consider the following questions:
- What are you saving for?
- Where are you starting?
- What is your realistic timeline?
- How can I set small, actionable steps that will help me progress toward this goal every day?
Taking a more realistic approach to your savings that is centered around setting SMART (specific, measurable, achievable, relevant, and time-bound) goals can effectively help you minimize excess spending and begin hitting your money milestones.
Eliminate High-Interest Debt
To see immediate improvements in your financial standing, focus on figuring out how to eliminate bad debt.
Bad debt refers to any debt that comes with an interest rate that sits anywhere between 12-24% or higher. If you pay off this debt prior to investing, it means that you’re no longer paying that amount of interest anymore and that can prove tremendously beneficial in the long run.
Track Your Spending
In order to know how to spend your money, you need to know where it’s going.
If you don’t already have a routine practice for reviewing your budget, expenses, and income, you should implement one that works for you. Seeing the numbers in front of you eliminates any guesswork and can help you more easily recognize habitual patterns and trends in your spending.
Make a Budget
Once you establish exactly how you’re spending your money, you can make a decision about how you’d like to move forward with your spending.
If you’d like to reduce or increase spending in certain categories, now is a great time to create a budget that fits your lifestyle.
Most budgets are broken into spending categories, which makes it easier to determine which items you spend the most on so you can begin to understand these patterns and take action to correct any overspending if necessary.
Set Up Automatic Savings
Before you pay for anything else, pay yourself first.
When you decide to set up automatic deposits to your savings account every time you get paid, you can’t lose.
By using this method, you’ll never forget to contribute money to this account and you won’t necessarily miss this money over time since you’ll be accustomed to not having it in your checking account on payday.
Strategies for Investing Money
The mere thought of investing is enough to make some people fearful, but it is not as complex as we first make it out to be.
In fact, being a successful investor is really based on how knowledgeable you’re about investing strategies and the businesses you’re choosing to back. There are many different strategies for investing that can be used depending on the types of investments you wish to make. Let’s take a closer look at each one now.
Cash and Commodities
Cash and commodity investments are low-risk investments that typically produce low returns. These include assets like gold, bank products (savings and money market accounts), and cryptocurrencies.
We’ve been investing in gold for a long time, but this does not necessarily mean that it is a good investment. The price and value of gold are based on a mindset of scarcity and fear, so if you feel that fear is going to continue to increase over the next few years, gold may be the investment for you!
Bank products like savings and money market accounts function similarly and also do not get a great return on investment.
Plus, last but not least, cryptocurrencies have no intrinsic value. This makes them a risky and volatile investment that lacks backing from any kind of centralized financial institution.
Bonds and Securities
Bonds and securities are other types of low-risk investments. Bonds can be purchased from the US government, state and city governments, or individual companies. These include U.S. savings bonds & corporate bonds and mortgage-backed securities.
Bonds are considered some of the safest investment options because you’ll only lose money if the issuer defaults on the loan, which is very uncommon.
In the case of the U.S. government, a bond purchased through them is almost risk-free whereas corporate bonds are riskier because you’ll want to do research on the company before deciding whether or not to invest.
There is also the option to invest in a mortgage-backed security, which is funded by a pool of home or other real estate mortgages.
However, these investments are a bit more complex because unlike other bonds, which pay the principal at the end of the bond term, mortgage-backed securities pay out interest and principal to investors monthly.
Investment funds are made up of a pool of money collected from multiple investors that are then invested into many different things including stocks, bonds, and other assets. The collection of investments typically tracks a market index. Examples of investment funds include mutual funds, index funds, and ETFs.
Mutual funds are investments made by a money manager who invests your money for you and attempts to get good returns. Though this seems like a less risky option, these financial experts have a tough time beating the market.
Plus, they also charge you for their services. You’ll learn more (and have more fun!) when you choose to manage your own funds.
Index funds also diversify your investment across multiple stocks. However, index funds are not directly overseen by a money manager.
Instead, they’re passively managed and their success is based on how well the index fund you’re tracking performs. Most indexes track the market, so if the market performs well so will the index, and vice versa. If you feel confident in the future of the economy, an index fund could be a safe bet.
Exchange-traded funds also track a certain index but they’re also bought and sold on the stock market. This gives you more control over the purchasing price, but not necessarily over how well the index you invested in is going to perform.
The Stock Market
Investing in the stock market is one of the most common ways to begin investing.
Oftentimes, you can choose between stock options and individual stocks as your method of choice. When you purchase an individual stock in a company, you become a partial owner of the company. The owner can then sell the stock for a profit.
With stock options, you’re trying to determine whether the price of a company’s stock will increase or decrease. It allows you to buy or sell shares of that company for a specific price during a specific time frame without needing to own the stock.
This creates a lot of risks, especially if you’re unsure of what you’re doing, and is not a recommended strategy for new investors.
There are two major types of retirement accounts: a 401K and an IRA. Both accounts are made up of cash you put aside and then invest in various ways.
The risk and reward of retirement accounts are completely dependent on what they’re invested in, which can vary greatly. In addition to these retirement accounts, annuities are another investment type that you may want to consider as part of your retirement plan.
Annuities are a contract between an investor and an insurance company where the investor pays a lump sum in exchange for periodic payments made by the insurer. they’re typically used to supplement income and ensure steady monthly payments during retirement. There’s no real risk to annuities, but there’s no real chance of return either.
And last but not least, we have real estate investments, which can come in the form of properties and real estate investment trusts.
Finding a deal on a property can be worthwhile, but it can also be extremely expensive. The benefits are you can make money by buying the property at a below-market rate and selling it at full price or by renting/leasing the property to tenants.
Additionally, you can also try your hand with real estate investment trusts. A Real Estate Investment Trust, or REIT, is similar to a mutual fund because it takes the funds of many investors and invests them in a collection of income-generating real estate properties.
Plus, REITs can be bought and sold like stocks on the stock market so they can be cheaper and easier to invest in than property.
The main drawback for most beginning investors is the high barrier to entry for real estate investing. However, if you can find a way to get around it, real estate can turn out to be a lucrative revenue stream.
Which is Better: Saving vs Investing?
Saving is great, but it’s not enough on its own. If you really want to grow your wealth and reach financial freedom, then you need to invest.
It’s important to both save and invest, and learn how to do so early on. If you can master these financial habits, you can set yourself up for an incredible financial future.
How Much Money Should I Save?
If you’re wondering how much you should have in a savings account, start with three-to-six months’ worth of living expenses. If you have a big upcoming expense, such as schooling or a car, save for that too.
This could mean you’re saving for a few years before you’re ready to invest, but that’s ok.
Setting aside money every month is good practice for when you’ll transfer funds to your brokerage account later on. If you want to save faster, check out my tips on how to save $10,000 in a year.
There’s a difference between saving a cushion of money for emergencies, though, and hoarding money in a savings account out of fear of losing it. Once you’ve got your emergency fund and the money you need for the foreseeable future, it’s time to invest.
How Much Money Should I Invest?
If you have an emergency fund saved up of three-six months’ worth of expenses, no bad debt, and you’ve covered all your bills for the month as well as any big upcoming purchases, and still have an extra $500, you can invest.
You’d be surprised at how quickly you can grow your wealth when you start investing even a small amount of money.
And if you’re just getting started, it’s a good idea to start small. As you continue to learn, get more comfortable with investing, and earn a return, you can begin to invest more.
The important part is to start. With the power of compound interest, even $500 has the potential to grow into a fortune, but it needs enough time and patience to work.
Start Your Investing Journey
If you’re like a lot of people, you probably have some fear around investing in the stock market. Investing in stocks has been portrayed as “risky” while saving has been portrayed as “safe.”
But how safe is it if you’re putting your future in jeopardy because you’re losing purchasing power year over year rather than having the potential opportunity to grow your wealth by 10% or 15%?
If you’re considering keeping your money in a high-yield savings account vs stocks, you’re missing out on the opportunity to actively grow your money through investing.
At the end of the day, it is important to know your financial baseline and your goals so you can determine whether saving vs investing is the best course of action for you at this moment. Then, once you have a foundation to build upon, it is best to start doing both as soon as possible.
Savings will give you the financial foundation you need to feel secure, but investing will give you access to the life that you’ve always dreamed of.
Both are absolutely critical in order to prepare for the future, but investing will take your money farther faster. If you want to fast-track your financial goals, start investing today.
Download my guide on Investing for Beginners to learn seven easy steps that you can use to make your first investment.
This guide summarizes the three most common types of investments for beginners and provides you with a simple roadmap for how to execute these concepts to confidently kickstart your investing journey and begin moving toward your biggest financial goals.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.