Whether you have an esta൩blished financial plan or are just beginning to consider how to put your money to work, you should keep in mind the differences between saving and investing. These terms are often used interchangeably, but they represent different approaches to your finances. Consider saving and investing at different points in your life, but the key is to understand the pros and cons of each and how they fit into the bigger picture of your financial journey.

The Basics of Saving and Investing

Most people tend to confuse saving and investing. It's easy to see why, though, because both involve setting money aside. But, the reasons and ways you save and invest are different, which we highlight below.

Saving

Saving refers to setting aside cash in a low-risk, low-return environment. This could include traditional or online 澳洲幸运5官方开奖结果体彩网:savings accounts, 澳洲幸运5官方开奖结果体彩网:money market accounts, 澳洲幸运5官方开奖结果体彩网:certificates of deposit (CDs), or even a sꦕituation in which you hold onto cash outside of a financial institution.

Money held in one of these settings is more liquid than money in most investment types, which means you can access it more quickly and easily if necessary for emergencies or short-term goals. However, in exchange for carrying a lower level of risk than investments, these methods of saving money also provide less of a reward—in this case, they offer lower 澳洲幸运5官方开奖结果体彩网:rates of return.

One of the key characteristics of saving is that you won't lose your money. Although the return is generally low, the money you set aside in one of these accounts is insured by the 澳洲幸运5官方开奖结果体彩网:Federal Depos🐼it Insurance Corporation (FDIC) or the 澳洲幸运5官方开奖结果体彩网:National Cre🤪dit Union Adminis🎐tration (NCUA).

Investing

澳洲幸运5官方开奖结果体彩网:Investing your money means buying any of several different investment vehicles that carry a higher risk and, potentially, a higher reward. Investments may include stocks, bonds, 澳洲幸运5官方开奖结果体彩网:exchange-traded funds (ETFs), commodities, real estate, and more.

There are many ways to access investments, including through retirement accounts, mutual funds, individual stock trading, and more. However, regardless of the type of investment or its particular 澳洲幸运5官方开奖结果体彩网:risk and reward profile, the goal of all investments is the same: to grow🍸 your wealth over the long term. Keep in mind that not all investment vehicles carry the same level♏s of risk and reward. Some, such as bonds, may require months or even years before reaching maturity.

Factors to 🌃Consider When Deciding to Save or Invest

Saving and investing involve setting aside money for a future goal or expense. However, the time horizon, level of risk, and most pertinent financial goals vary depending on whether you are looking at saving or investing your money. Looking at these factors can help you 🔥determine what to prioritize:

Time Horizon

One of the biggest considerations when deciding whether to save or invest is your 澳洲幸运5官方开奖结果体彩网:time horizon. To realize short-term 🎀goals, keeping your money in a savings account or similar vehicle may make more sense because you won't hold the money long enough for it to grow significantly in an investment setting.

vice president and financial advisor at Morgan Stanley, says that saving is usually better “when the time horizon for liquidity is under 12 months.” He adds that saving for short-term goal🎶s by “depositing that pool of money in a savings account may make more sense than investing it be🦂cause [you] can feel confident that the money will be there” when the goal arrives.

On the other hand, other financial goals may be more significant or more open-ended. If you’re 澳洲幸运5官方开奖结果体彩网:planning for retirement, you a♋re more likely thinking years or even decades ahead. Longer-term goals like this benefit from an investment-centered approach. The longer time horizon of these priorities means your money has the opportunity to grow more significantly if it is invested. As such, you won't need it to be liquid until you get close to reaching the goal at some point in the future.

Risk Tolerance

Your 澳洲幸运5官方开奖结果体彩网:risk tolerance is the degree of risk that you are willing to take on given the potential volatility o♑f a financial decision. Saving your money is less risky than investing it. If you invest your money, you stand to potentially lose your principal or initial investment.

Consider a situation in which you’re looking ahead to a longer-term financial goal. Given your time horizon alone, you might be inclined to assume investing is the best approach. However, if you are uncertain about your job, periods of 澳洲幸运5官方开奖结果体彩网:volatility in the market, or what your financial si𝔉tuation will be, it may be safest to put your money in a savings account instead.

Financial Goals

Laying out clear financial goals will help you to decide when it is appropriate to sa꧃ve or invest—or a combination of both. Financial goals may be large,🌺 such as preparing for a down payment on a home, a new vehicle, college tuition, or planning for retirement. They may also be more modest, such as saving for a small purchase or a short weekend trip.

The nature of your financial goals will influence your decision to save or invest. If your goal requires quick access to cash, you’ll likely opt to hold money in a savings account or similarly liquid space. On the other hand, if you hope for better returns on your money tha🤡n can be achieved with savings account interest rates and over a long time, then investing may be the answer.👍

Pros and Cons of Saving

Saving offers security but lower potential for rew🦩ards.

Pros Explained

• Low level of risk: Saving your money entails a low level of risk, which means your money is safe.
• Money is FDIC or NCUA insured: In the event of a bank run, the Federal Deposit Insurance Corp. or National Credit Union Administration insures your deposits. Keep in mind that only certain deposit accounts are covered.
• Accessibility to your funds: Savings and similar accounts typically make it easy to access your funds.
• Ease of use: Most savings vehicles do not require regular upkeep or observation.

Cons Explained

• Lower potential returns: You won't get as much bang for your buck by saving compared to investing.
• May erode purchasing power: Savings accounts may fail to keep up with 澳洲幸运5官方开奖结果体彩网:inflation, which can erode your purchasing power over medium- and long-term time horizons.

Pros and Cons of Investing

Investing offers both benefits and downsides. Baskir notes that “investing is by nature a trade-off between risk and return, so those who are willing to stay the course in a 澳洲幸运5官方开奖结果体彩网:diversified portfolio, over long periods of time, in an🔜y market environment, should stand to be rewarded wit൲h returns that outperform that of cash equivalents earned from saving alone.”

Pros Explained

• Potential for (significantly) higher returns: You stand a better chance of earning higher returns on your principal. As your investments grow, they allow you to take advantage of 澳洲幸运5官方开奖结果体彩网:compounding to accelerate gains.
• Align with your investment strategies: Investing in different asset classes, such as stocks, bonds, mutual, and ETFs, can help you achieve your investment strategy goals.
• Choose where you invest: Investing your money allows you to buy into companies, industries, and sectors that interest you or that you support.

Cons Explained

• Less liquid: Investments are less liquid than savings. It may take more time to access your funds, and it could potentially cost you money, as in the case of withdrawing early from retirement accounts.
• High volatility: Markets for stocks, commodities, real estate, and other assets are often highly volatile, meaning that you may not achieve gains and may even lose some of your principal.
• May require more monitoring: Some approaches to investing are very hands-on and require both time and specialized knowledge.
• Subject to external factors: Investors can be swayed by biases and 澳洲幸运5官方开奖结果体彩网:emotion-based decision-making, which can adversely impact their investments.
  

Determining the Right Approach

According to Baskir, “saving is to walking what investing is to running.” He adds that it’s vital to “have enough saved up for a rainy day, typically equal to three to six months worth of expens🐈es in the event of a layoff, health issues,” or other unexpected changes tᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚo a financial situation before investing.

To determine what works best for you, consider this checklist:

• Do you have an adequate cash cushion to cover three to six months of fixed expenses? If not, 澳洲幸运5官方开奖结果体彩网:start saving.
• Do you have other short-term goals requiring quick access to cash (like travel plans)? If so, start saving.
• Are you on track to reach your retirement goals by your desired age? If not, start investing.
• Do you understand the risks involved in investing this money for a long-term goal such as retirement? You may not be able to access it until age 59½ without taxes and a penalty, plus you’ll face volatility risk, etc.
• Are you comfortable waiting to access your money to take advantage of 澳洲幸运5官方开奖结果体彩网:compounding? If so, you may want to start investing.
• Do you feel comfortable with your current split of saving and investing every month? Where does it feel like you’re falling short?

Saving vs. Investing: Example

Let’s say you're in your late 30s, single, and earn six figures. You have about two months of expenses in savings and just over a year’s salary in your company-sponsored 401(k). You also recently 澳洲幸运5官方开奖结果体彩网:paid off your student loans and have $500 to reallocate to your other financial goals,🤪 which include:

• Boosting your emergency fund to cover at least three months of expenses
• Increasing your retirement savings to ensure that you will be able to retire at age 67 with an income that covers your needs
• Putting aside extra money for travel

The amount you decide to contribute to each category depends on your priorities. It’s also🌳 subject to change. For instance, you might decide that in the short term, creating an emergency fund that covers three months of expenses is most important. Once that goal is f🍰unded, you can move on to putting more money toward retirement (and fun). 

When to Save vs. When to Invest

Saving may be the best option to establish a rainy-day fund for short-term financial goals, for access to your funds on short notice, or if your risk tolerance is low and you want to protect your pr👍incipal. Investing may make sense if you already have an emergency fund, are planning for long-term financial goals, seek compounding interest, can hold your funds in a less accessible account, o📖r have a higher risk tolerance.

Choosing a Savings Account

A variety of savings accounts are available, including traditional accounts, online-only accounts, 澳洲幸运5官方开奖结果体彩网:high-yield accounts, money market funds, and more. Check out 澳洲幸运5官方开奖结果体彩网:Investopedia’s in-depth guide for an overview of ♍many of the most popular savings account options and suggestions on how to pick the right acco𓂃unt for you.

Choosing a Brokerage Account

Selecting a way to invest your money can be a much more complex question than selecting a savings account. Most beginning investors will use a 澳洲幸运5官方开奖结果体彩网:brokerage account to facilita💝te trades. Many of the leading brokerages offer an easy-to-use interface, free trades in certain cases, and acces🧔s to a variety of assets including stocks, mutual and exchange-traded funds, and more.

It pays to consider the ways you plan to invest—actively or passively, what types of asset classes you will target, and so on—and to use 澳洲幸运5官方开奖结果体彩网:Investopedia’s guide to select 🌳a broker🎶.

The Bottom Line

Saving and investing are sometimes used interchangeably, but they represent different ways of using your money. Saving refers to holding your funds in a low-risk, low-return savings account, CD, or money market account, while in🌟vesting refers to buying and selling stocks, bonds, ETFs, mutual funds, commodities, and/or real estate.

Saving is generally better for investoඣrs with short-term financial goals, a low risk tolerance, or those in ♕need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.