Should you put your money in a savings account or invest it? Are savings and investing the same thing? Some people think so, but it’s the differences that are key. This article can help you decide whether you should focus on saving or start investing so you can reach your financial goals.

Saving vs. Investing: What’s the Difference?

While both involve money, there are key differences between saving and investing. Saving means putting away funds in a safe place, like a bank account, for future use.

Investing involves taking some risk and buying assets that will increase in value over time and provide more money – called returns – in the form of income or capital gains.

When to Save

There are different types of savings strategies: you can save for emergencies, for retirement, and for short- and long-term goals. Financial advisors recommend your top priority should be having a financial cushion for emergencies.

Emergency Fund

What happens if your car needs repairs? Or what if you get hit with an unexpected medical bill? Do you have enough cash on hand to cover these emergencies? According to experts, most people don’t have enough money put away to deal with a sudden, urgent financial need. If you haven’t already done it, setting up an emergency fund can make you more financially secure and give you some much-needed peace of mind.

How much should you set aside? It’s wise to have at least three to six months’ worth of living expenses set aside in an interest-bearing savings account. But if you can’t manage that, every little bit helps – even $500 can come in handy in an emergency. You can then put aside a little cash each month to further prepare for an unexpected expense.

Short-Term Savings

After you’ve fed your emergency fund, saving is a smart move if you need the cash within five years for a specific purchase, such as:

• A down payment on a car
• Home repairs
• Even a vacation!

You should keep short-term savings in a savings account, a money market account, or certificates of deposit (CDs), where returns are guaranteed. These funds should not be invested in the stock market. If you purchase CDs, which usually have higher returns than savings and money market accounts, you can ladder their maturity dates so that you have access to some of your savings at all times, penalty free.

The Pros and Cons of Saving

Pros

• Saving is simple, especially with automated deposits, and you can access your money quickly when you need it.
• If you put your money in a bank, your deposits are guaranteed up to $250,000. Savings accounts, money market accounts, and CDs are safe, and while the returns are lower than you might realize with investments, you’re not going to lose any money.

Cons

• Because returns are low, it’s likely (but not guaranteed) that you could earn more by investing your money.
• Lower returns also mean you may lose purchasing power over time because of inflation.

When to Invest

Investing can help you grow your wealth. You should consider putting more money toward investments if:

• Your emergency fund is in good shape: You’ll want to have at least three to six months’ worth of living expenses set aside.
• You’ve paid off high-interest debt: Credit card debt can really hamper your ability to save and invest. Knocking down that debt can free up money you can put to better use.
• You’re thinking about retirement: Everyone wants enough to retire comfortably, and the sooner you start building your retirement fund – through an employer-sponsored 401(k) or IRA – the bigger your nest egg will be.
• You want to build a college fund: If you have young children and want to save for their college education, you can invest in a tax-deferred 529 education savings plan or a Coverdell education savings account (ESA).

The Pros and Cons of Investing

Pros

• Stocks often have far higher returns than savings accounts, money market accounts, and CDs. And with the power of compound interest, investments can grow exponentially.
• Because investments are typically quite liquid, stocks and bonds can easily be converted into cash.

Cons

• Because the market fluctuates, you might not recoup your original investment if you sell when the market is low.
• Investing can be complex, so you’ll likely need the advice and services of an expert. If you are buying stocks on your own, you’ll have to research companies yourself, as well as monitor the market. That can take a lot of time.

Saving or Investing: Which is Better?

The bottom line is that saving and investing each have their benefits and drawbacks. Neither is better in every circumstance. Finding the right balance is key to a successful strategy. The good news is that it’s possible to save AND invest at the same time.

Don’t Neglect Your 401(k)

While you’re feeding your emergency fund, make sure that you’re on track and contributing enough to your retirement plan, such as a 401(k) through your employer. If they’re offered, take advantage of any employer matching options, which can help grow your savings. If you don’t have a retirement plan through your company, think about traditional or Roth IRAs. When it comes to saving for retirement, the earlier you start the more your fund can grow.

Saving and investing can help you reach your financial goals – both short-term and long-term. Contact our team today if you’d like help with your savings or investments.