Saving and investing are both critical to achieving your financial goals. They both require you to put money aside, although for different purposes.
So, what exactly is the difference between saving and investing? We’ll walk you through it.
When you put together a budget, you need to make sure you’re earning enough to cover your basic expenses—things like rent, groceries, and monthly student loan payments. Hopefully, you’ll have some money left over after the basics are covered, and that’s money you can save. And your savings is typically earmarked for short-term financial goals.
For example, one of the most common reasons people save is for emergencies, by creating a rainy day fund. This fund is usually left in a savings account until needed; It’s essentially a financial safety net.
But people also save in order to buy a new car, house, and to pay for college.
Investing means that you’re putting your money to work, meaning that you’re expecting a return on your investment.
Investing in the stock market generally means you are purchasing an asset, usually a stock, a bond, or fund. When you purchase stock, you’re buying a small portion of a company, and when you purchase a bond, you are purchasing the debt of a company or a government. When you purchase a fund, you’re acquiring a basket of stocks, bonds, or cash, or possibly all three.
Why do people invest rather than put their money in savings? Two main reasons: To earn a return (their money grows with time), and to keep ahead of inflation.
And people generally invest with the hope of earning more money on their investments than they would from putting that money in a savings account, over the long term.
The risks of saving vs. investing
When you put your money in a savings account, it’s generally pretty safe—but that doesn’t mean there aren’t risks and downsides. Typically the Federal Deposit Insurance Corporation (FDIC) will insure up to $250,000 in a bank deposit account.
Savings accounts, however, typically offer pretty low interest rates. So, if you plan on stashing your money in savings for an extended period of time, you’ll probably see its value whittled away due to inflation.
Some banks also charge fees for savings and checking accounts, which can further eat into your savings.
Investing, too, has its risks.
One of the primary risks of investing in stocks, for example, is that some companies may not succeed in creating profit or revenue, or they miss production deadlines, or have a bad quarter, or a bad year. This could cause your investment to lose value. If you’ve invested in bonds, they could also lose value, for example, if interest rates go up, or inflation is on the rise. The stock market can also see-saw on a daily basis, and with it the value of your assets.
The value of your investments can also change when rules and regulations change, which could make it either easier or, alternately, more difficult to conduct business. There are methods for curbing your risk, such as diversifying your holdings, but no investment is entirely free of risk.