Saving vs. Investing: What’s the Difference?
- Savings and investing sound like the same thing on the surface, but each can have significantly different impacts on your money, especially over time.
- Savings is generally useful to help you achieve near-term goals and includes little to no risk so you are guaranteed to have your money there when you need it.
- Investing is generally used to achieve longer-term goals and historically has produced better returns than savings but comes with added risk.
To save or to invest? Both are important habits to help you achieve your financial goals, but when you get into the details, the two terms are not as interchangeable as one might think.
The immediate differences to consider between saving and investing includes the time you have to achieve the goal and your risk tolerance for that specific amount of money. It’s important to note that while you may have an overall high-risk tolerance, it can vary based on when you want to use different pools of money. Due to the higher risk associated with investing, it is also important to have 3-6 months of expenses saved in an easily accessible savings account before you begin your investment journey.
The table below illustrates the fundamental differences between saving vs. investing.
| Factor | Saving | Investing |
Time Horizon |
Generally, savings is used for near-term goals for your money such as saving for emergencies, a car, vacation, down payment on a home |
Generally, investing is used more for long-term goals such as saving for college or retirement. Some investments like 401ks and IRAs are specifically designed for retirement |
Risk |
Most savings instruments such as high-yield savings accounts, certificates of deposit (CDs), money market accounts have lower risk |
Most investments like stocks, bonds, mutual funds, real estate, commodities have risk associated with them, especially in shorter time windows |
Predictability |
Savings instruments nearly always have a predictable return |
Not predictable because returns are based on market fluctuations |
Safety |
Most savings instruments are insured and guaranteed up to $250,000 by the NCUA |
Most investments have no guarantees |
Accessibility |
Most savings are easily accessible and easy to liquidate without penalty. Some CDs have maturity dates and penalties may be incurred if they are liquidated before that. |
Most investments can be liquidated without penalty, but you may incur transaction fees and commissions. IRAs and 401ks are not accessible without penalty until age 59 1/2. |
Returns |
Savings grow through interest paid by the financial institution for depositing your money. Returns over the past 40 years have ranged from .025% to 8%. |
The average return from the S&P 500 over the past 100 years is 10.53% annually.1 |
If you’re seeking professional guidance from an experienced Wealth Advisor, Wealth Management by CommunityAmerica is here to help you on your financial journey. Schedule a complimentary consultation with a Wealth Management by CommunityAmerica Wealth Advisor and they can help you find the right path.
