At first glance, saving and investing can look like the same thing. In both cases, you’re pulling money from your checking account and putting it into a fund where you’ll (hopefully) let it sit for a long, long time.
But there are important differences between these two financial activities. They can serve similar purposes in terms of building wealth and improving financial stability, but they go about this process in very different ways—and it’s important to understand both the benefits and limitations of each activity.
Let’s dive in and see how investing and saving stack up against one another.
The Basic Principles of Saving
A savings account is a cornerstone of any successful financial plan. Putting money into a savings account can help you build up an emergency fund or save for a larger purchase while earning a little interest on your money in the bank.
Unlike money you invest, there is no risk of losing money you save; whatever you deposit into a savings account is safe from any financial losses. Saved money is liquid and available if you need it in a pinch. If you have to fly home on short notice to visit family, for example, it could take several days to access money that is held in investments. But if you have money in a savings account, you can quickly transfer or withdraw the money you need to purchase your flight.
It’s always smart to keep some money on hand in a savings account. But as your savings grow, you should start looking at ways to contribute money to investment funds.
Why Investing Is Important
When it comes to deciding whether to save or invest, investing offers one giant benefit: Whereas savings accounts offer only low yields, investing allows you to make higher returns on your saved funds.
Consider this: If you invest $1,000 into an investment fund and earn an average return of 6 percent each year, you’ll have $1,791 after 10 years. After 20 years, you’ll have $3,207. Thirty years? A whopping $5,744.
Compare that to $1,000 placed in a high-yield savings account that earns 2 percent interest every year. After 30 years, that initial investment will only grow to $1,811.
Of course, investing isn’t quite that simple. There’s also the added risk that comes with investing. If an economic recession hits, you could lose money instead of turning a profit. Additionally, some investment accounts, such as 401(k)s, lock up your funds until you reach retirement age. If you want access to those funds before then, you’ll get hit with a hefty early withdrawal fee.
If you’re looking to build wealth and fund your retirement, investing is crucial. Given the risk involved, however, you want to make sure you have separate funds saved to ensure your financial security.
How to Balance Saving and Investing
Which is more important, saving or investing? In reality, successful financial planning requires both. To maximize your financial prosperity and stability, you need the combination of benefits that savings and investments each offer.
Saving is key to financial wellness because of the stability that comes with having an emergency fund in place. It is also important to have financial assets that aren’t tied up in investments or susceptible to economic dips.
Investing brings more risk, but it also offers far better earnings potential than saving can provide. And certain types of investments, such as individual retirement accounts, can offer tax benefits that make them an attractive short-term financial move, along with their more obvious long-term benefits.
In the end, saving and investing isn’t an either/or decision. Both are important, and both are needed to maximize your financial wellness and opportunities down the road. Have questions about your saving and investing plans? Talk to a member of our team today.