Saving vs. Investing: How to Know Which Is Right for You

Saving and investing have a similar goal: storing money for your future. But whether you should choose to save or invest your cash comes down to your risk tolerance, goals and time horizon. If you’re looking to save, you’ll likely opt for a low-risk, low-return deposit account for short-term goals. If you’re investing, you may choose to put your funds in a higher-risk, higher-reward investment account, like a 401(k) or individual retirement account (IRA). Learn the difference between saving and investing to determine which, if not both, are best for you. 

Similarities Between Saving and Investing

Saving and investing both help you reach your financial goals by allowing you to set aside money for the future and ideally watch it grow. 

Assuming you’re not storing cash under your mattress, both saving and investing also involve opening an  account with a financial institution, such as a savings account with a Federal Deposit Insurance Corporation (FDIC)-insured bank or National Credit Union Administration (NCUA)-insured credit union. 

But that’s where many of the similarities end. While the terms saving and investing are often used interchangeably, they are two very different approaches to building your wealth.

Differences Between Saving and Investing

While saving and investing both involve setting aside money for your future, they come with very different risks and potentials for returns, and they should be carefully chosen based on your goals for the money.

Saving is typically for short-term goals and emergency funds, which advisors say should cover three-to-six months worth of expenses in the case of an unforeseen cost. You can save with low-risk products that provide moderate returns, which means your money won’t grow as much as it would in the financial markets, but it’s also not at risk of disappearing. 

You can open savings accounts — which include traditional savings accounts but also high-yield savings accounts, certificates of deposits (CDs) and more — at a bank or credit union. The FDIC or NCUA insurance on these accounts protect your funds up to $250,000 per account even if the bank goes out of business. 

Investing comes with higher risk and higher rewards, and is best suited for long-term goals. Investment products aren’t FDIC-insured, but the Securities Investor Protection Corporation protects up to $500,000 in your account (with a $250,000 limit for cash) in the case that a brokerage firm fails.

But there’s still risk: When investing, you can lose your initial principal — the money you invest —  especially with riskier investment products. Even though investing is higher risk, it’s a crucial element of a financial plan that can help you reach costly financial milestones like buying a house or retiring, as well as retaining your money’s worth during times of high inflation. 

	Savings products	Investment products
Account type:	Bank or credit union account	Brokerage account
Typically best for:	Short-term goals	Long-term goals
Insurance in case the institution collapses:	Up to $250,000 at institutions protected by the  FDIC or NCUA	Up to $500,00 at institutions protected by the SIPC with a $250,000 protection limit for cash
Risk level:	Low risk	Higher risk
Return potential:	Lower returns	Higher returns
Risk of losing principal?:	No	Yes

Saving vs. Investing Products

There’s a wide variety of savings products, with popular options including traditional savings accounts, high-yield savings accounts, checking accounts and CDs. Each type of savings account has different levels of liquidity and growth potential to consider. 

For example, funds placed in a CD must stay untouched for the entire CD term, which is typically between three months and five years. With a high-yield savings account, you can access your money whenever you want, but you’ll see slightly lower interest rates than those on CDs.

Investing accounts, on the other hand, tend to come with the potential for higher returns alongside greater risk. Types of investment accounts include 401(k)s, individual retirement accounts (IRAs) and taxable brokerage accounts. Popular investing products you can buy within many of these accounts are bonds, stocks, mutual funds, exchange-traded funds (EFTs) and commodities (like gold). 

Consider consulting with a licensed financial advisor before buying any saving or investment products to ensure they work in your best interest.

When to Save and When to Invest

Financial advisors tend to recommend building up your emergency savings fund before investing. Investing involves a higher level of risk, including the risk of losing your initial principal, and because the market can be volatile, you want to invest money you won’t need in the short term. This lowers the chance of needing to sell your investment when the market could possibly be lower than when you initially invested. While investing or saving will come down to your specific financial situation, goals and risk tolerance, a general rule of thumb is to not invest money you may need within five years.   

But you don’t want to avoid investing, which is a way to reach long-term goals like retirement. While even high-yield savings accounts offer annual percentage yields (APYs) of around 5% in 2024, their potential for growth is much lower than money you invest in the financial markets. The S&P 500, an index generally used as a benchmark of the U.S. stock market, averages an annual return of around 10%. In addition to saving for your goals, it’s important to invest to help your money retain its buying power. If you won’t need the money for at least five years, consider investing. 

Remember, you aren’t limited to one or the other. If you have a strong emergency savings fund, you can — and likely should — continue saving for other short-term goals while you invest to build your wealth. 

Sources:

Quicken. (2023, February 15). Amidst Another Wave of Layoffs, a New Quicken Survey Uncovers What Is Driving Americans’ Personal Finance Decisions. Retrieved from https://www.quicken.com/press/amidst-layoffs-what-is-driving-personal-finance-decisions

U.S. Securities and Exchange Commission. (n.d.). Saving and Investing. Retrieved from https://www.sec.gov/investor/pubs/sec-guide-to-savings-and-investing.pdf
U.S. Securities and Exchange Commission. (n.d.). Understand What It Means to Invest. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/save-and-invest/understand-what-it-means-invest

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