When it comes to creating a strong and healthy financial future, both saving and investing are critical tools you'll want to understand.

The main differences between saving and investing are the risk, return and time-horizons you take while putting money into your various accounts.

Specifically, saving money in a savings account is no/low-risk as long as you use an insured (FDIC or NCUA) financial institution. You benefit from on-demand liquidity and can send large sums of money to external accounts as you need, for a down payment on a home, a car or another large expense. Compared to savings accounts, investing can be risky business. A large percentage of investors lose their money due to an improper investment strategy.

Financial literacy is crucial if you want to start investing because of its dependence on stock markets that are out of your control. When embarking on this journey, it's also important to set up appropriate financial goals and stay prudent to keep your financial profile moving in the right direction.

In this article, we'll provide a breakdown of saving vs investing , compare other factors, and explain how these types of accounts (and financial actions) can work together to build your financial wealth.

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The Basics of Saving and Investing

Although saving and investing may sound similar, experts consider these two actions distinct from each other. Sure, the goals are the same - to help you generate more money, to build financial freedom, and to help support your lifestyles - but the methods couldn't be more different. Before hopping into the difference between saving and investing, let's talk about the similarities.

When it comes to savings and investing, we are empowering our money to make more money. By foregoing spending our money today, we're letting other companies or people borrow it, and they pay us for that right. And that sounds pretty good, doesn't it?

It's simple at the core! Now, let's dive a bit deeper...

Depending on the financial institution you use and the risk levels of the borrowers or investments they support, you can expect higher or lower returns on your money. Using a low-risk financial product like a FDIC-insured bank account offers the lowest level of risk to you and therefore come with lower rates of return. These types of accounts are best for that money you just can't afford to lose. Cash savings are ideal for putting some money aside for an emergency fund or for upcoming living expenses or large purchases that are imminent.

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Pro tip: If you're being an offered an insanely good rate on a checking or savings account product, you may want to look a bit deeper. That account may look and feel like a savings account, but it might not be FDIC-insured and may therefore have quite a bit more risk than you intended.

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The Difference Between Saving and Investing

Surprisingly, a large number of people think that saving and investing are synonymous. Though they are similar as outlined above, the intended purposes of a savings account vs investing account are quite different. Understanding this different is key to building financial literacy to avoid making massive blunders with your finances.

The primary discerning characteristic between investing & saving is the risk tolerance. Customers use savings accounts for no/low-risk and acceptable lower financial returns. You know your money in your savings account is going to be there when you need it. Common types of accounts include a savings account, CDs (certificate of deposit), and money market account. Though money market accounts are not FDIC-insured, they do have other structured protections that make them largely comparable. And it's important to avoid a checking account. While these funds are inherently safe, a checking account typically 0% rate of return.

Investing, on the other hand, should be understood as a different set of financial tools. Common types of investments include bonds, stocks, ETFs, and mutual funds. Investing typically takes greater care as there is a very real risk of loss. There are certain strategies for investing that favor capital preservation versus higher growth, and if you're new to these concepts a financial advisor may be a prudent next step.

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Savings accounts

• Example account type - Often a bank account
• Financial return - Low
• Usual products - CDs, money-market accounts, savings accounts
• Risk of Loss - Nearly zero
• Financial literacy required - Nearly zero
• Timespan - Variable
• Inflation protection - Moderate
• Liquidity - On demand, with the exception of locked CD products
• Cost - Low or non-existent, check fee schedules

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Investment accounts

• Example account type - Brokerage account
• Financial return - Variable
• Usual products - Bonds, mutual funds, stocks, ETFs
• Risk - Variable, risk of principal loss may be high
• Financial literacy required - Variable, may be high
• Timespan - Intermediate to long, 2-20 years
• Inflation protection - Variable, may be high
• Liquidity - Variable, subject to investment vehicle restrictions
• Cost - Variable, subject to investment vehicle

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The Pros and Cons of Saving

Saving money comes with plenty of benefits and it's a generally great idea. Your money can be withdrawn when you need it, but it also grows in size based on the return associated with your account.

Here are the pros and cons of savings accounts:

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Pros

• The FDIC (Federal Deposit Insurance Corporation) provides a federal guarantee to bank balances up to $250,000 for a single individual and $500,000 for accounts with joint owners. The returns are lower than if you were to invest, but you also won't lose any money from your savings account. Savings accounts are ideal for increased financial security.
• Savings accounts are very clear on how large of an interest rate you'll earn on your account balance. Identify an online savings account for even higher yields!
• Saving money is simple - you don't need any specific knowledge or help from a financial expert; simply open the account and move (deposit) your money. You'll start to earn interest immediately and that's about the extent of what you'll have to do.
• Bank account services (such as a savings account) are extremely liquid which means you'll be able to withdraw the money whenever you want. Just make sure you avoid accessing a CD before its maturity date as you may have to pay penalties on it.
• There are often no fees associated with savings accounts; this also means it comes in handy as a safety net in case something unexpected happens and you need to cover the costs. This makes savings accounts ideal for an emergency savings fund, growing your down payments on a home, car or other large life expense, or other funds you can't afford to lose.

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Cons

• Returns are relatively low so you may have trouble generating a viable annual percentage yield. Investing can potentially bring you more (but it's not a guarantee).
• Inflation is the biggest enemy of saving; if it gets too out of hand, you'll lose purchasing power, essentially gutting your returns even further.

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The Pros and Cons of Investing

While saving is safer and easier to get into, investing is potentially far more lucrative. Or losing everything. The truth is, investing & saving are both methods of generating more money but investing is the one that can help you achieve your financial goals quicker.

With that said, it's difficult to start and you could face issues even if you know what you're doing. Here are the pros and cons of investing:

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Pros

• The stocks you invest in can generate quite a lot of income each year. The S&P 500 (Standard and Poor's stock index) returns about 10% annually. However, this can change each year and depends on a variety of macroeconomic factors that you have no control over.
• Having a diversified investment portfolio can generate risk-adjusted returns that beat inflation to grow your money year over year. Compared to even high-yield savings, a couple of suitable investments can generate a large amount of income and grow your net worth considerably by taking a long-term position.
• Liquidity can be high if you're invested in a stock market with daily liquidity. For example, stocks listed on the NYSE or the NASDAQ, or exchange traded funds or mutual funds all have high degrees of liquidity, but alternative investments, real estate and thinly traded securities may not provide you the liquidity you need to convert your investment into usable cash when you want it.

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Cons

• Returns can be high but are also volatile. The value of your portfolio will constantly fluctuate and there's a high chance you'll lose some money in the short term if you're not appropriately diversified or have your money invested in riskier investment products. In the beginning, investors generally make costly mistakes and it takes a while to get enough experience to know when to invest and when to close your positions.
• Investing is complicated and can be tedious to master; you may want to ask for investment advice from financial advisors to help you understand your brokerage account, how the stock market works, and any other intricacies related to investing.
• There's an ever-present possibility that you won't get back what you've invested. Knowing when to sell and how to opportunistically identify long term investments is absolutely crucial in realizing positive returns.
• Ideally, you'll want to keep the money you invested for as long as possible. This is done so you can live through possible downdrafts and value drops but it also means you won't be accessing that money for quite a while.
• Brokerage accounts can come with higher fees; you may have to pay a monthly fee for trading and potentially a financial expert to manage your money. Beware of fees!

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Should you Save Money or Invest Money?

It all depends on your situation and circumstances. If you're not worried about job loss or your credit card balance, or even if you have some investable assets to spare, then investing could be a viable choice. Alternatively, saving is better in situations where you can't afford the risk.

Here's a more detailed overview of both choices:

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When should you open a savings account?

There are a couple of situations where you'd be wise to open a savings account. For starters, if you want to or need to use that money in the near future, then opening a money market fund or a high-yield savings account are the best choices.

On top of that, if you plan on investing, you should first create an emergency fund and start building up your emergency savings. Most financial experts suggest having between three and six months worth of potential expenses within your emergency fund.

Lastly, if you're currently straddled with high-interest debt due to exceeding your credit card balance. Investing before paying off said high-interest debt would be a bad move so you should work towards dealing with it.

A savings account with annual interest rates will give you better returns once you start investing.

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When should you open an investment account?

Most people who start investing do so to begin building a retirement fund. So, if you don't need the money for at least the next five years and if you aren't worried about the risk - then investing is the choice for you.

Additionally, if you qualify for an employer-match for retirement accounts such as a 401(k), contributing enough money essentially gifts you with free money (sort of).

In short, investing is a long-term commitment to the future and shouldn't be done unless you're financially secure enough to do so. It's risky, difficult, and takes a long time to get going but - if you play your cards correctly, there's the potential to build significant financial wealth.

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Final Words

In recent years, living expenses and costs have gone up dramatically which means just a regular paycheck simply isn't enough anymore. People have begun to open checking accounts, contact a credit union, and try their hand at various other financial options to earn a bit more.

Overall, investing & saving serve the same purpose, one that should make your life easier down the line. Saving is for that low-risk money that you simply don't want to lose while investing is a great option to grow your wealth over the long-term.

Lastly, don't be ashamed of asking for help. Money is not easy. Feel free to contact experts or the relevant financial institutions for help. There are plenty of specialists out there that can help.

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