Saving and investing are two key components of personal finance. They are both important for achieving financial security and reaching different goals. The main difference between saving and investing is that saving is the act of setting money aside for future use while investing is the act of putting money into assets to gain a financial return.
Investing typically involves more risk than saving, but it also has the potential to provide a higher return. Both saving and investing are important for financial security and should be a part of every person’s financial plan. However, it’s important to understand the difference between the two so that you can make the best decision for your individual needs.
What Is Saving?
Savings refers to the act of setting aside money regularly for future expenses or emergencies. It’s a low-risk affair that also gives you low interest. You can save through a savings account at a bank or through a retirement account.
Saving money will help you achieve different goals, such as going on vacation, setting up an emergency fund to cater to the unexpected, and purchasing a home, among others. It provides you with a way to be able to achieve short-term financial goals.
Pros of saving money
· Helps you build an emergency fund
· You can achieve short-term goals, like buying a car.
· Minimal risk of loss
The cons of saving money
· You get low yields when you save your money in a savings account.
· Loss of value due to inflation
· Opportunity costs you when you fail to invest your money.
· Savings accounts typically charge maintenance and other fees, which may eat into your savings.
What Is Investing?
When you invest you select a project or venture and put money into it with the expectation of earning a return on that investment. You can invest in the stock market, bonds, or other securities, businesses, or by buying property.
There are many reasons why people choose to invest. Some people invest to earn a high return on their investment, while others invest for safety and financial independence. Other people even invest to support a cause or company they believe in.
No matter what your reason for investing is, you need to be able to choose the right investment. Every investment has its own set of risks and rewards. It’s important to educate yourself on that before you put your money into it.
Pros of investing
· The right kind of investment will earn you a higher return.
· You will be able to achieve long-term goals with the money you make from the investment.
· Diversification can help you reduce risk.
The cons of investing
· There is a risk of loss, especially if you don’t choose the right investment.
· You need to be disciplined and committed.
· May require time to start earning returns.
How To Choose An Investment Account
Investment accounts will help you achieve your long-term investment goals. It’s important to make sure you have the right one. Before you pick an investment account here are important questions you need to answer.
1. What are your investment objectives?
What is your current financial position and what are your financial priorities? Once you answer that you can come up with financial goals and objectives. Then choose an account that will serve the purpose. Examples of investment objectives are
- Saving to pay for your Child’s education
- Building a retirement account for future wealth
- Setting up an emergency fund to cater to unexpected costs
2. What is your risk tolerance and investment time frame?
Investment accounts are best for mid to long-term investments. If you are young you have more time to invest and take risks. The vice versa is also true. As you get older look out for less risky investment accounts.
3. When will you need to access the money?
Investments are long-term, and you need to assess when you will require the money. Choose accounts that allow you to withdraw when you require the money.
If you are not sure about the investment account that will work for you, seek investment advice from an accredited financial advisor.
The Difference Between Saving and Investing.
Investing and saving are key to building long-term financial security, but they are different. Saving is putting money into a safe, liquid account like a savings account, a money market account, or a certificate of deposit (CD). The main goal of saving is to have money available for short-term needs, like emergencies or unexpected expenses.
On the other hand, investing is putting money into assets like stocks, bonds, or mutual funds. The goal of investing is to grow your money over time. When you invest, you take on risk, but you have the potential to earn a higher return than you would from a savings account. Here is a summary of the main differences.
| Description | Savings | Investing |
| Returns | Low returns | A higher return based on the investment type |
| Risk | low or no risk | The risk depends on the investment |
| Products | Savings account, Certificate of deposit, money market funds | Stocks, bonds, mutual funds, ETFs, real estate |
| Time horizon | Short term | Long term |
| Difficulty | Easy | Harder depending on the type of investment. |
| Inflation protection | Little to no protection | High protection from inflation especially for long term |
| Liquidity | High apart from CDs | Low liquidity but depends on investment. |
How Savings Accounts work
A savings account is a bank account where you can deposit money and earn minimal interest on it. The money in a savings account is usually less accessible than the money in a checking account. This makes it a good place to save for short-term goals.
Savings accounts typically earn interest, which varies depending on the type of account and the bank. Some savings accounts have restrictions, such as a minimum balance or a limited number of withdrawals per month. You can open a savings account online or by visiting your bank branch.
How To Pick A Savings Account
There are many different types of savings accounts available, and it’s important to choose the right one. Each type of account offers different interest rates, fees, and features. To pick the best savings account for your needs, consider the following factors:
Minimum balance requirement
Some accounts require a minimum deposit, while others have no minimum. Check the minimum amount you will need to open the account.
Access to the money
How often do you need access to your money? If you need to access your money frequently, you’ll want an account with no or low fees.
Interest rates
Choose an account with a higher interest rate, as that will help you grow your savings faster.
Fees and other account expenses
You need to choose an account with minimal or no charges. High charges and expenses will eat into your savings.
Other features
What other features do you need? Some accounts offer features like online banking, mobile deposit, and ATM access.
When Shouldn’t You Save Money?
There are certain times when it doesn’t make sense to save money. Here are situations when you shouldn’t cash saving is not a wise financial planning decision.
· When you have high-interest debt, it’s better to focus on paying that off first. Pay off the debt first and avoid accumulating interest.
· There are also times when it’s better to spend money than to save it. For example, if you need to buy a new car or make a major repair, it’s usually better to use your savings to pay for those things.
· When you can earn a substantial interest in investing.
· Don’t save your money if your money will lose value due to inflation.
Focus on what’s best for your financial journey.
Saving Or Investing? The Better Option
Whether you save or invest depends on your current financial circumstances. Here is when you should consider each of them.
When to save
· If you haven’t built an emergency fund, you need to start saving. Start saving and creating an emergency fund.
· Don’t start saving if you have high-interest debt, such as credit card debt.
· Save money if you will need money to achieve your short- and long-term goals.
When to Invest
Invest after accumulating enough emergency funds.
If you don’t need the money for some time, consider investing.
Investing Key Takeaways
There are a lot of different strategies and techniques that can be used when it comes to investing. And while there is no one-size-fits-all approach, there are some key takeaways that can help you decide on your investment strategy.
· Diversify your portfolio. Don’t put all your eggs in one basket. Instead, spread your investments out across a variety of different asset classes to mitigate risk.
· Have a long-term perspective. Don’t try to time the market. Instead, focus on investing for the long haul.
· Stay disciplined. Investing can be emotional, but it’s important to stay disciplined and stick to your plan.
· Know your goals. What are you trying to achieve with your
Are You Ready To Invest?
Investing your money is a great way to grow your wealth over time. Before you start investing, make sure you are ready. There are a few things you should ask yourself before you start investing:
· Do you have enough money to cover your basic living expenses?
· Do you have any high-interest debt that you should pay off first?
· Do you have an emergency fund to cover unexpected expenses?
· Do you know the various investment options?
If you can answer yes to all of these questions, then you may be ready to start investing. But even if you’re not quite ready yet, that’s OK. Just continue saving your money and working on getting your financial house in order. Then, when you’re ready, you can start investing with confidence.
Why Do Some People Fail At Investing?
There are many reasons why people fail at investing. Here is why you may fail at investing.
· Lack of investment skills
· The emotional bias that leads to impulsive investment decisions
· Failure to research leads to poor investment decisions.
The Bottom Line
In conclusion, the main difference between saving and investing is that saving is meant to provide you with funds for short-term goals while investing is meant to provide you with funds for long-term goals. Both are important for achieving financial stability, but it’s important to understand the difference between the two so that you can make the best decisions for your future. If you’re still not sure which is right for you, talk to your financial advisor for guidance on the best financial route to take.
