The main difference between saving money and investing is the amount of risk involved. Money in a savings account usually earns a guaranteed return through interest, though the rate may vary depending on the type of account. Investing gives you the potential to earn more, but the risk is generally higher.
Let’s examine how the differences between saving and investing can affect your financial strategy.
What is saving money?
Savings accounts let you earn interest on your money while keeping it easily accessible. A savings account is generally best for short- and medium-term goals, such as saving for a down payment on a car. These accounts can also be used for emergency funds, which may take longer to build but need to be accessible in case something unexpected pops up.
Here are a few common types of savings accounts:
- Traditional savings accounts: These are offered by most banks, allowing you to earn a little interest while having easy access to your money.
- Certificates of deposit (CDs): CDs lock your money away for a set period – usually a few months to a few years – in exchange for a fixed interest rate that is usually higher than a standard savings account. There may be a penalty for withdrawing your money early.
Money in these accounts are generally FDIC insured up to FDIC limit.
Benefits and drawbacks of savings accounts
Benefits
- Low risk: Depending on the institution and the balances in your accounts, your savings may be FDIC insured up to FDIC limit.
- Easy access: You can usually access your money quickly and without penalties (excluding most CDs). Keep in mind that some savings accounts limit the number of transactions you can make per month.
- Guaranteed returns: You may earn guaranteed interest on your money, though rates are typically variable.
Drawbacks
- Low returns: The interest you earn on savings can be minimal compared to the returns you might receive from investing
- May not keep up with inflation: The interest earned may not match inflation, so your savings may lose buying power over time
What is investing?
When you invest, you use money to buy assets, such as stocks, bonds or mutual funds. Investing involves risk: There’s no guarantee that your investment will grow, and you could lose all or part of what you invested. That said, investing also offers the potential for higher returns than you might find with savings accounts.
In general, investing tends to be less volatile over a longer time horizon. Diversifying your investments may also help protect you against market volatility.
Investments can range from low-risk options, like bonds, to higher-risk ones, like stocks. Common investment vehicles include:
- Stocks: When you buy stocks, you buy a share in ownership of a company. These can go up or down in value over time based on the company’s performance.
- Bonds: Bonds are debt securities that are typically issued by governments or companies. When you purchase a bond, you give a loan to that issuer, in exchange for interest plus the return of your initial investment.
- Mutual funds and exchange-traded funds (ETFs): ETFs and mutual funds are collections of individual securities (such as stocks and bonds) bundled together. That way, you don’t have to select individual securities to invest in.
- Retirement accounts: These accounts are designed for long-term investing and can either reduce your taxable income when you contribute or be withdrawn tax-free in retirement. If you’re contributing to a 401(k), for example, you’re already investing. Those retirement accounts are typically invested in mutual funds or ETFs. There are also accounts like Traditional and Roth Individual Retirement Accounts (IRAs).
- Brokerage accounts: These accounts don’t have the same tax benefits of retirement accounts, and they aren’t subject to the same requirements. Brokerage accounts let you invest in securities on your own.
Benefits and drawbacks of investing
Benefits
- Potential for higher returns: Investments like stocks can offer the potential for significant growth over time. On average, the stock market has historically seen a 10% annual return over the long term, but this is an average and not a guarantee for any single year.
- Liquidity: Many investments can be easily sold when needed, although their value may fluctuate.
- Potential to beat inflation: Investments can outpace inflation over time, helping you grow your net worth.
Drawbacks
- Risk: There’s no guarantee you’ll make money from investments. It’s possible to lose part or all of the money you invested.
- Complexity: Investing requires research and understanding of the markets, which can be overwhelming for beginners.
- Taxes and Fees: You can be taxed on your returns, with rates varying based on factors like the type of asset, your income and how long you’ve held that security. Some investments also come with management or transaction fees, which can affect your returns.
Key differences between saving and investing
Although both saving and investing can help you grow your money over time, there are important differences:
| |
Saving |
Investing |
|---|
| Risk involved |
Minimal |
Yes |
|---|
| Time |
Short- or medium-term |
Long-term |
|---|
| Return |
Relatively low |
Can vary |
|---|
| Fees |
Zero or low |
Depends on the brokerage or product fees |
|---|
Deciding when to save and when to invest
When choosing between saving and investing, the best option depends on your financial goals, risk tolerance and timeline.
When to use a savings account
A savings account is a useful tool when you need easy access to your money or are working toward short-term financial goals. You may consider a savings account when:
- You’re building an emergency fund to cover unexpected expenses
- You're saving for a big purchase in the short or medium term, like a vacation or a car
- You want to be able to access funds easily
When to invest
Investing is ideal when you have long-term goals and are willing to accept some risk in exchange for higher potential returns. You may consider investing when:
- You’re saving for retirement or other goals that are further in the future
- You’re comfortable with the possibility of market fluctuations and temporary losses
- You want to grow your wealth over time and potentially outpace inflation
- You already have adequate savings, including an emergency fund, and can afford to take on more risk
Saving and investing both have a place in your financial life, allowing you to pursue different goals. Once you understand the differences, you can set up a strategy to grow your money.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
