Both investing and saving involve setting aside money today to prepare for the future. So it’s understandable that some people mix them up, or think of them as alternatives to one another. But they aren’t the same, and how you combine them can have a big effect on your money.
The real difference between saving and investing is where you’re putting your money — which, in turn, influences how much risk you’re taking, and how much your money could grow while it’s saved / invested.
How saving and investing work
Piggy banks and mattress hoards technically count, but when we talk about saving, we really mean putting your money in a savings account at a bank — one that’s insured by the FDIC. FDIC insurance guarantees that if something happens to the bank you’re using, you won’t lose any of your money (up to $250,000). That means when you save (up to that much), you’re taking zero risks.
When you put your money in a savings account, you earn a small amount of interest. The national average is 0.09%, and even “high yield” savings accounts only pay around 2%. That’s because technically, the bank is paying to borrow that money from you — they use cash flow from customer deposits to loan money to other people (and charge their own interest).
Still, you can withdraw your money any time you want. There’s a fee, though, if you make more than six withdrawals a month, which is meant to entice you to keep your savings in the bank. (There’s no penalty for taking money out of a checking account, like when you pay bills — but checking accounts don’t generally pay interest.)
Bottom line: Savings accounts are really safe, pay a small amount of interest, and allow you to get your money out quickly.
When you invest your money, you’re using your cash to buy investments. That might mean you own individual stocks, bonds, or alternative investments; or it might mean you own shares of a fund (aka a basket of individual investments), like you’ll have if you’re an online client of Ellevest.
As the values of your individual investments go up (or down), the value of your investment account will go up (or down). You might also earn payments called dividends from stocks, and interest from bonds. All that’s what makes it possible to earn (or lose) money by investing. The exact amount of risk involved depends on what kinds of investments you own.
So think of investing not as “spending” your money, but simply changing how it works. True, it’s not exactly the same as having cash (for one thing, you can’t pay rent with it). And as we mentioned, your investments might become worth substantially more or less than the cash you originally paid for them. But you can sell your investments to turn them back into cash any time you want — just give it a couple days to process. (You might also owe taxes if you sell investments that have gone up in value since you bought them.)
Bottom line: Like saving, investing is a way to put aside money for the future, while still giving you pretty quick access to that money if you need it. But unlike with a savings account, investing involves risk.
So if investing involves risk, why not just save all your money instead?
We’ll tell you why: Historically, over the long term, investing has been a lot more powerful than saving. This is true because investing involves risk — people demand to be compensated for taking on the extra risk of investing their money.
Does taking a risk feel uncomfortable? We get it. But when you’re talking about your biggest money goals, like retiring, you can’t really afford not to invest. That’s because — even though some individual years were up and some years were down — over the past 91 years, the stock market has returned an annual average of 9.5%. (Timely reminder: Savings accounts = 0.09% interest. For context, inflation has historically hovered around 2%.)
To put that into context, here’s what we project could happen if someone were to save / invest $25 a month for 40 years.*
Here’s why this matters: Research shows that women keep 71% of their assets in cash, compared with 60% for men — so they could be missing out on potential investing returns. Add in things like the gender pay gap, and it’s no wonder that generally, women retire with two-thirds as much money (and worse for women of color), even though they live an average of six to eight years longer. In fact, this gender investing gap could cost women hundreds of thousands — for some women, millions — of dollars over the course of their lives.
When you should save and when you should invest
So yes, we believe you should invest. But that doesn’t mean saving isn’t sometimes the right choice. There’s a time and place for both.
Whether you save or invest has to do with two things: time and risk. If you’re planning to need your money in the next year or two, then it might make sense to save. That’s because if the investing markets took a tumble, you wouldn’t have much time to give it a chance to recover. You should also use a savings account for the money in your emergency fund — if (when) you need that money for financial emergencies, it has to be there, 100% safe and sound.
On the other hand, if you have three-plus years until you’re going to need your money, then investing can make sense instead. And the longer your timeline, the more important it is to consider investing over saving. You also might choose to invest any money that you don’t need — aka money that you just want to grow as quickly as possible (and aren’t afraid to take risk with).
Moral of the story: Put both saving and investing on your money checklist. They aren’t the same, but they’re both useful. And they’re both part of a smart, future-focused financial plan. Get started today.
Check out this Investment Guide to Bonds by InvestmentCanvas.com
Are you ready to invest in yourself? Start here!
“I’m excited to work with Ellevest to start conversations about women and money. If you become a client, I will be compensated.”
- Can You Really Build A Business Giving Away Free Stuff? - August 2, 2020
- Sales Tips For The Reluctant Seller - July 26, 2020
- Best Content Writing Tips to Boost Your Personal Blog Storytelling - July 19, 2020