Saving vs. investing: What's the difference?

You know that putting money aside for the future is important. But do you know the best strategies to tackle both saving and investing in the years ahead?

There are some key differences between saving and investing. Both strategies involve accumulating money for future use, but their level of risk is not equal. And how you determine when to save and when to invest will depend on your budget and financial goals.

Fortunately, you can do both at the same time, which means you don’t have to choose one or the other. 

Saving vs. investing

Saving is generally considered a good approach if your financial goal can be reached in five years or less, such as planning for a vacation or buying a house. The money you put into a savings account is more liquid than the money you put into investments.

Investing, on the other hand, can help you work toward reaching your longer-term goals, such as retirement or a college fund for your future children or grandchildren. When it comes to investing, patience is key. The longer your money is invested, the more potential it has to grow and earn compound growth, which occurs when you reinvest the investment’s earnings to potentially generate more earnings.

The benefits of investing

Investing’s primary selling point is the potential for long-term wealth creation. Here are a few reasons why:

• Investing in the stock market historically brings more growth potential than cash or bonds, especially if you use a buy-and-hold strategy.
• Stocks’ historically higher returns can help you manage the effects of inflation, increasing or maintaining your spending power and helping you meet your long-term goals.
• Diversifying your investment mix between stocks, bonds and other vehicles can help smooth over any market volatility and keep your investment goals on track.

Watch this video on how to diversify your portfolio.

How investing works

There are many types of investment vehicles, including:

• Stocks
• Bonds
• Mutual funds/exchange-traded funds (ETFs)
• Real assets (such as real estate and commodities)

While you can buy and sell these assets at any time, some types of investments may need more time to mature, and there could be costs or penalty fees associated with selling or removing money from investments before they come to term. Others are more marketable (easier to sell), but you may not want to sell during a market downturn, so it’s better to approach them as long-term investments to get the best potential for growth.

A good way to start investing is through a retirement account. This could be a 401(k), an IRA or both.

• If you have access to an employer-sponsored retirement plan, check to see if they offer contribution matches. This means that for every dollar you contribute to your account, your employer contributes a certain amount, too—usually up to a specific limit.
• IRAs, or individual retirement accounts, are a good option if you don’t have access to a 401(k). IRAs are set up through a financial institution and most people are eligible to open and contribute to a traditional or Roth IRA. There are even options for individuals who are self-employed or small business owners.

Retirement accounts are typically made up of a mix of investment types such as stocks, bonds, mutual funds and ETFs. You can either set up your own ratio of these investment types, or choose a target date fund, which is an investment mix that’s optimized for your anticipated retirement date.

For example, if you’re close to retirement, your investment mix will often include lower-risk assets, whereas the farther away you are from retirement, the more risk you may be willing to take on, because you’ll have more time to bounce back from any market volatility. 

Investing key takeaways

• Take advantage of your employer retirement plan if you have access to one.
• Investing offers a potentially higher rate of return over a long period.
• There’s potential for risk of loss as the value of assets can fluctuate up and down.

The benefits of saving

While investing can help you achieve long-term financial goals, there should be a place for savings accounts in your financial plan, too. Here are a few benefits of keeping some of your money in a savings account:

• Your money will be easily accessible (liquid). This makes a traditional savings or money market account excellent choices for your emergency fund.
  
• Saving can help you work toward short-term goals such as a vacation or home repairs. Setting up automatic transfers from your checking to savings account can help your budget stay on track.
• Savings accounts are less risky than investment accounts. The Federal Deposit Insurance Corporation (FDIC) automatically insures up to $250,000 of your funds against theft or bank failure, as long as your bank is an FDIC member.

How savings accounts work

Saving is the lower-risk, lower-return option. Savings accounts can come in the form of:

• A certificate of deposit (CD)
• A money market account
• A traditional bank savings account

If you deposit money and leave it in a savings account, it will accrue interest over time, but typically at a lower rate than what investments have the potential to provide. You agree to let the bank keep your money for a while (sometimes a set amount of time, as with a CD; sometimes indefinitely, as with a savings account). In turn, the bank gives you a percentage of interest on that cash.

In general, you should begin building savings and pay off high-interest debt before you dive into investing, especially as protection against unexpected costs. The rule of thumb is to have at least three to six months' worth of your household income set aside in an emergency fund. 

Savings accounts key takeaways

• Establish your savings before you begin investing.
• Your money will be easier to access, and it’s at lower risk than investing.
• You’ll typically have a lower rate of return than investments.

Risk and rewards of saving vs. investing

Remember, your financial plan should include both savings and investments vehicles, depending on your short- and long-term goals. It’s important to understand both the risks and rewards of savings vs. investing.

How a financial professional can help

A healthy financial plan isn’t about deciding between saving vs investing. It involves both: saving for goals in the short term and investing for long-term growth.

Whatever your financial situation and goals, start thinking about both options, and consider discussing your plans with a financial professional.

They can help you put together a financial plan that accounts for both your short- and long-term goals and advise on the risks and rewards of vehicles that will help you best work toward those goals and build a strong financial future. 

Take this quiz, offered by U.S. Bancorp Investments, to learn more about your investing choices.