Is it better to save your money or invest it in stocks or other assets? If only there was a simple answer. Ultimately, who wins the battle between saving and investing will depend on your financial goals.
Which strategy should you choose based on your current financial situation? This guide can show you how investing and saving can both be used to potentially maximize your assets and help you choose the path that suits your goals.
If you need additional help defining your investment goals, consider finding an investment platform. The right tools can help you improve your financial knowledge and manage your goals.
What is saving?
Saving is putting money aside, usually in a savings account at a bank or credit union. Most people do this gradually, investing money every week or month and watching their savings build up over time.
Some savings accounts pay interest, although the rate of return tends to be slow, so it may be less common to use a savings account as an investment vehicle.
When to save
Saving is ideal for achieving relatively short-term goals. This could be a large purchase, like a car or house, or even building up your emergency savings so you’re prepared to cover unexpected expenses.
Accessibility of funds
Most savings accounts are easily accessible at any time, meaning you’ll always have access to cash when you need it most. If you open a savings account at the same bank where you have a checking account, you can easily transfer money between the two.
The earning potential of a savings account is generally limited to what you put into it. Although some savings accounts pay interest, the interest rates on these accounts are relatively low compared to investment accounts.
Saving involves almost no risk.
Most major banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per banking customer. The only time you’ll take a chance is if you have money significantly above the FDIC limit or if you’re saving when you could be investing.
How to choose a good savings account
When selecting a savings account, look for features like:
- No minimum deposit amount
- No withdrawal limits
- No monthly maintenance fees
- High interest rates
If you open an account at the same bank as your checking account, you’ll likely find it easier to transfer funds and monitor your savings from a centralized online banking app.
What is investing?
Investing is a wealth management strategy that involves purchasing assets and building your wealth in the hope that they will increase in value. For example, you could buy stocks at $100 per share and then sell them when they reach $150 per share, which would result in a 50% profit.
Investing can be a great option for retirement savings, although it can be a path forward for anyone looking to build wealth.
When to invest
Investing is generally a better strategy when saving for a long-term goal. This is why many retirement accounts include things like exchange-traded funds (ETFs) or mutual funds, as they provide diversification and wealth generation potential over a period of time for those looking to grow their assets in the long term.
Accessibility of funds
The money in your investment account will not be accessible in the same way as a traditional bank account.
This is mainly because you will need to withdraw funds from your brokerage account and then transfer them to a bank account or request a physical check. This may take time and if you use a bank transfer you may be charged a fee. This shouldn’t be a problem if your investments are part of a retirement account, but it won’t be as flexible as a traditional savings account.
The average rate of return on the stock market since 1926 has been about 10%, considerably higher than any savings account. Some stocks pay dividends, giving you a source of passive income that can be reinvested in the same company.
Alternative investments can also offer profit potential. Crypto investing can fall into this category, although the higher the gain, the higher the risk.
Risk is perhaps the biggest difference between savings and investment accounts. Investing involves risks, sometimes high ones. Investors can help manage this risk by diversifying their investments and seeking long-term gains through stable, well-researched investments.
How to choose a good brokerage account
A brokerage account will provide the digital infrastructure needed to purchase assets like stocks, place trades, and track your progress. You will want to look for a brokerage account with the following features:
- Low brokerage fees and commissions
- Paper Trading Options
- Educational materials that help you learn how to invest
- Resources that help you research new investments
- Tools to help you track your progress
It’s important to find the right balance. For example, a discount brokerage account may seem attractive, but it won’t always offer additional tools and resources that can help you refine your investment strategy.
Saving or investing: choosing the right option
Saving can be a great strategy when you’re focused on short-term goals, like building an emergency fund. On the other hand, investing can be appropriate for building wealth over time, just as you would save for retirement. Ideally, consumers should use both strategies to potentially maximize their wealth and help them achieve their short- and long-term goals.
Frequently asked questions
It’s not always easy to know how much to save or invest. Ideally, you need enough savings to cover three to six months of expenses. Once you have configured a emergency fundyou may consider allocating money to a investment account.
Are you wondering whether it is better to save or invest? It depends on your specific goals. Saving money can help you accumulate money for short-term applications, but investing may be appropriate if you actively want to build wealth, while being aware of the risk involved.
It’s certainly possible. Investors can potentially lose money in the process, including the entire invested capital, which cannot happen in a bank account.
Mutual funds and ETFs can offer built-in diversity to help mitigate some of these risks and pave the way for long-term investing.