Saving vs. Investing: What's the Difference?

What we'll cover:

• The difference between saving and investing.
• Why saving is good for short-term goals.
• Why investing is good for long-term goals.
• Why both are important for your overall financial strategy.

You’ve probably heard the words “saving” and “investing” thrown around interchangeably – the most obvious example of this is “saving for retirement.” But saving and investing are actually entirely different things. And while you might know that they are different, do you understand how they are different? Why each one plays an important, but separate role in helping you meet your financial goals? 

Maybe you’re already doing one, or both of these. Maybe you’re clueless about what to do. No matter your circumstances, there’s no time like the present to start learning about saving and investing.

To start, you need to understand the basic definitions and the fundamental differences between the two.

What is saving?

When you save, you’re putting money somewhere safe to use for a future, often short-term goal. Usually this means you’ll put money into a savings account, money market fund or certificate of deposit where your money can grow at a predictable rate, thanks to interest. And if you open a savings account that’s FDIC-insured, your deposits are protected up to a certain amount.  Saving money is predictable and safe – you know exactly where your money is and how much money it’s earning (the interest). 

For example, let’s say you put $10,000 into a high-yield savings account earning 2.15% interest. Assuming you keep that full amount in your account and the rate remains unchanged, in five years, you’ll have earned over $1,100 in interest. And that’s if you don’t make any additional deposits over that time. If you’re wondering how that math works out, read up on compound interest.

What is investing?

When you invest, you’re putting money into something – typically the stock market – with the expectation that it will generate more money over time. Common types of investments include stocks, bonds, mutual funds, index funds and exchange traded funds (ETFs) – more on some of these later.  Investing money involves risk and uncertainty. Investments tend to be volatile, which means they fluctuate in price – sometimes they lose money and sometimes they make money. And unlike a savings account with a fixed rate (such as a certificate of deposit), there are no predictable returns when you invest.

The upside? Historically, investing in the stock market *on average* generates higher returns. The double asterisks are there for a reason because there’s a lot of nuance to this. 1) This is according to historical performance of the Standard & Poor’s 500 Index – a popular benchmark for US stocks. 2) Those higher returns are a result of leaving money invested over a long period of time. 3) As mentioned above, nothing is guaranteed when it comes to investing. What happened historically may be different from what happens in the future. 

Difference between saving and investing

The key difference is this: When you save money, you’re putting your money somewhere safe to use for a future, often short-term goal. When you invest money, your money is subject to risk and uncertainty, but you’re expecting a greater return. Investing is good for long-term goals. 

So when is it better to save versus invest? The answer depends on your financial goals, how much time you have to meet those goals, and how much risk you’re willing to take. Another answer is that you should ideally be doing both, but for different reasons and with different financial goals in mind.

When should you save?

You should consider saving for things like building up your emergency fund and paying off high-interest debt (e.g., credit cards). If you don’t have an emergency fund, or you still have high-interest debt, it’s probably wise to start with saving.

Saving can also be used to meet short-term financial goals like paying for a wedding, vacation or things that may require cash within the next five years. Again, because what you earn on your savings can generally be more predictable, you can map out the cost of those short-term goals and then put money in a savings account to work toward paying for that goal.

Key takeaway: if you think you’ll need cash for something in the near-term, save your money in a place where it can grow and be accessible, ideally with a high-yield interest rate. 

When should you invest?

Have a retirement account? Congratulations – you’re probably already investing. As noted earlier, people “save for retirement,” but if you look closely at your retirement plan, your money is likely invested in some combination of stocks and bonds. Investing can be used to meet long-term financial goals, like planning for retirement or paying for a child’s education. Why? Because the longer you leave your money invested, the more time it has to grow (with some help from compound interest), typically with a higher return than what a savings account will offer. 

There’s a world of information available if you’re looking to learn more, but for most people, investing doesn’t need to be complicated. Here’s how to keep it simple: Start with understanding the basic difference between stocks and bonds. Stocks tend to be considered more aggressive than bonds because they carry more risk. A general rule of thumb is that the younger you are, the more risk you can afford to take. Bonds tend to be considered conservative because they carry less risk – and as you might guess, you generally want to take less risk as you get older. 

The key is making sure that your investment portfolio has the right mix of assets based on your goals. For instance, make sure your retirement plan – whether that’s a 401(k) or an IRA – has the right mix of stocks and bonds based on the amount of time you plan on keeping that money invested and your risk appetite. Set up automatic contributions, revisit that plan on occasion, and adjust as needed.

Retirement plans might even offer a “target date fund,” which are often mutual funds that allow you to set a target retirement date (e.g., 2055 target date fund). Target date funds automatically adjust to be more conservative as you get closer to the target date. This could be a great option if you’re looking to automate your finances and don’t want to get in the weeds of adjusting your portfolio. 

A note about 401(k)s: Some companies offer an employer match, meaning for every contribution you make up to certain point, they will also make a contribution. The details of employer matches can vary, so check with your employer. If your company offers this benefit, take advantage of it – it’s essentially free money, provided you’re contributing.

Key takeaways: investing is for the long term, and it doesn’t need to be complicated. If your company offers an employer match for your retirement plan, it’s a good idea to take advantage of it. 

Why both savings and investing are important

Ideally, saving and investing are both part of your overall financial strategy and are happening at the same time. For example, you’re contributing to your retirement plan while also saving for your honeymoon. If you’re new to both, you probably want to start with building your savings and contributing as much as you can to retirement. 

Want a good way to learn about saving and investing money? Put your money to work by opening a savings account, contributing to your retirement account, and then paying attention to what your money does. You’ll probably learn a few things just by doing and observing.  If that sounds too time-consuming or utterly boring, it’s completely fine to keep it simple. Make a plan to automate your contributions, revisit that plan occasionally, and adjust accordingly. 

No matter your style, just remember the key takeaways:

• Saving and investing are important, but different ways to help you reach your financial goals. Saving means putting your money in a safe place for future a use. It comes with very little risk and can offer smaller, but safe and predictable returns. Save to meet short-term goals and build emergency funds.
• Investing means putting your money somewhere with the expectation that your money will grow over time. Investing involves more risk, but could come with higher returns. Invest for long-term goals (e.g., retirement, paying for college).
• How you approach each depends on your goals, risk appetite and timeline. At the end of the day, you should do what’s best for you.