Why Investing is Better than Saving
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A shared characteristic of saving and investing is the importance that they both 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 use of your income.
Saving should be short-term while investing should be long-term. The biggest and most influential difference between saving and investing is risk. You save when you put money, 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. When you invest, you have the potential for better long-term gains or rewards, but also the potential for loss. You risk more when investing for a large return, but your potential loss can be huge as well.
It is important to review your goals to figure out which option is best for you, saving or investing. Choosing incorrectly could cost you a lot of money in fees or loss of potential income earned through investing.
When investing, we want our investments to make us money, while the goal of saving is to keep our money safe, making very little return.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.
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.
Saving and investing are both important concepts for building a sound financial foundation, but they’re not the same thing. While both can help you achieve a more comfortable financial future, you need to know the differences and when it’s best to save compared to when it’s best to invest.
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 or retirement. We use specific investment vehicles that allow for growth. Long-term investment plans can help you successfully reach that goal.
Saving
We save for purchases and emergencies. Saving money 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 value to your goals.
You should 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 short-term goal.
Savings tools
Savings accounts
A savings account is a bank account that allows you to set money aside and earn interest in the process.
Some savings accounts pay a lower interest rate while other savings accounts offer higher interest rates that can actually help you grow your money.
Money Market accounts
A money market account is like a savings account in the fact that it earns interest.
Money market accounts usually offer higher interest rates than savings accounts, but that isn’t always true. This type of account may also allow you to write checks.
Money market accounts sometimes have higher minimum balance requirements.
Banks may also be able to restrict the number of withdrawals you can make on these accounts before you have to pay fees.
Savings bonds
Savings bonds are issued by the government. You can buy a savings bond and earn interest over time. Interest rates on savings bonds aren’t always great.
Savings bonds usually work out best if you hold them to full maturity, which can take up to 20 years. If you redeem them early, you may have to pay an interest penalty.
Certificates of Deposit
Certificates of deposit (CDs) allow you to earn a higher interest rate on your money. You may be able to withdraw the money early depending on the terms of your CD.
Usually, you’ll have to pay an interest penalty. Some CDs offer penalty free withdrawals, but they often offer lower interest rates.
Investing apps
Investing apps, such as Stash and Acorns, make it easy to start investing from your phone. Each app has its own selling points.
Investing tools
Robo-advisors
Robo-advisors, such as Betterment, Personal Capital, and Wealthfront, allow you to invest with the help of an automated advisor.
The software will build a portfolio for you based on your risk tolerance, goals and other factors. From automatically rebalancing your portfolio, to reinvesting your dividends, and even using tax-loss harvesting to minimize the taxes you pay as you invest.
Because you aren’t dealing with a traditional advisor, the fees for these services are often much lower. However, they still cost more than doing it yourself.
If you don’t feel comfortable investing on your own, a robo-advisor can be a great compromise between solo investing and a full-fledged, expensive, investment advisor.
When to save money
A high-yield savings account or money-market fund will likely be best for you, if you’ll need the money in the next few years.
Most experts suggest having three to six months worth of expenses set aside in an emergency fund before you dive into investing.
Paying off a loan with a high annual interest rate will likely give you a better return than you can earn from investing.
When to invest money
If you don’t need the money for at least 5 years or more and you’re comfortable taking some risk, investing the funds will likely yield higher returns than saving.
If you’re eligible for an employer-match in your retirement account such as a 401(k). Contributing enough money to ensure you receive the match is key.
If you have built up your emergency fund and don’t carry any high-interest debt, investing your extra money can help you grow your wealth over time and to achieve long-term goals like retirement.
While investing can be complex, there are easy ways to get started. The first step is learning more about investing and why it could be the right step for your financial future.
When to Save and When to Invest
Ultimately, it’s up to you to decide whether saving or investing is the better choice to reach your financial goals. For certain goals, one is better than the other. It can be difficult to know when you should be saving and when you should be investing.
Saving is the safer route because the dollar amount in your bank account won’t usually decrease unless you withdraw funds, but interest rates on savings accounts don’t allow your money to grow very quickly.
Unfortunately, interest rates are often much lower than the rate of inflation. This means your savings could lose purchasing power over time. It’s tempting to want to invest to receive higher returns and beat inflation.
The value of your investments won’t always go up. In some cases, your investments can become completely worthless. How do you know when you should stick to the safer route and save or risk more to earn huge returns and invest?
How to decide whether to save or invest
Deciding whether to save or invest for a particular goal can be difficult. Here are some tips that can help you decide which is better for you.
If you have short-term goals, save
If you absolutely need the money by a certain date, save rather than invest. With saving, there is no risk of your balance decreasing. Investments can decrease in value.
If you have long-term goals, invest
Investing provides an opportunity to get greater returns if you have a long time horizon and can delay your goal if things don’t go as planned.
The key is to be able to delay your goal. If investments are down at the time when you originally planned to reach your goal, delaying by a couple of years could result in your investments returning back to a much higher value.
Or, do both
You can mix saving and investing. You can save the money you absolutely need and invest the money that would be nice but isn’t necessary to meet your immediate goals.
Another option is investing toward the beginning of a long-term goal and slowly switching to saving as your goal gets closer. This helps avoid a sudden drop in your investment values that could delay achieving your goals.
Knowing when to save or invest can be difficult. Every person’s situation is unique. You should base your decision on your particular situation. If you’re not sure what to do, you should consult a financial advisor that can help you make a better and well informed decision.
Pros of investing
Investing can be beneficial, too.
Investing gives your money the potential to grow faster than it could in a savings account. If you have a long time until you need to meet your goal, your returns will compound.
Investing products are generally very liquid. Stocks, bonds and ETFs can easily be converted into cash on almost any weekday.
If you own a broadly diversified collection of stocks, then you’re likely to easily beat inflation over long periods of time and increase your purchasing power.
Cons of investing
While there’s the potential for higher returns, investing has quite a few drawbacks, including:
Returns are not guaranteed, and there’s a good chance you will lose money at least in the short term as the value of your assets fluctuates.
Depending on when you sell and the health of the overall economy, you may not get back what you initially invested.
You’ll want to let your money stay in an investment account for at least five years. You’ll want to hold your investments as long as possible and that means not accessing them.
Because investing can be complex, you’ll probably need some expert help doing it unless you have the time and skills to teach yourself how.
Fees can be higher in brokerage accounts. You may have to pay to trade a stock or fund and you may need to pay an expert to manage your money.
Pros of saving
There are plenty of benefits to saving rather than investing.
The amount you save in a savings account won’t decrease over time as long as you don’t make withdrawals.
Saving also allows you to reach your goal on time as long as you save the proper amount each month.
Take the total you need to save and divide it by the number of months until you need to reach your goal to find the exact amount of money you need to save each month.
Cons of savings
Despite its benefits, saving does have some drawbacks, including:
Returns are low, meaning you could earn more by investing (but there’s no guarantee you will.)
You may lose purchasing power over time, as inflation eats away at your money.
Ultimately, it’s up to you to decide whether saving or investing is the better choice to reach your financial goals. And how and whether you invest, save, or do a combination of both will more than likely continue to change over the years as your priorities and goals shift.