You may know that you should save and invest, but what is the difference? Saving and investing both involve holding on to money, but that’s where their similarities end. We’ll walk you through the process of saving and investing so you know the similarities and differences between the two. This way, you can begin to plan out your financial future.
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What is the difference between saving and investing?
There are some differences between investing and savings. Read on to find out.
Saving happens when you put money aside into a savings account in a bank. There is very little money growth besides what you contribute to the savings account. The upside to this is there is little to no chance of losing money. You also have much easier access to your money when it’s in a savings account than when you invest it.
Investing is the strategic use of money to help it grow. You are buying assets with the potential to increase in value. These assets typically include stocks, bonds, property, and more. Investing is not guaranteed like saving, but money growth has more potential.
Similarities between saving and investing
Though investing and saving are different, their goal is the same. Both build wealth over time. A healthy financial strategy leans on both for a sound financial future. Both investing and saving require putting your money into a financial institution. For saving, that’s a savings account at a bank. Investors, however, put their money into brokerage accounts.
Should I be saving or investing?
Ideally, you should be doing both. But before you jump off into the world of investing, there are a few things to consider.
Build your emergency fund
One in four Americans has no emergency fund. You never know what hardships are on the horizon, and it’s better to be safe than sorry. There are a variety of surprise expenses that threaten your financial security: losing a job, medical bills, car repairs, and more.
Saving for these emergencies should come first. Having an emergency fund as a safety net is critical. The amount can vary depending on your budget and lifestyle, but most experts recommend 3-6 months of living expenses. This number can go up if you are the sole provider for your family or you’re self-employed.
Pay off high interest debt
Another priority you should have is paying off high-interest debt. High-interest debt is preventing you from maximizing both your savings and investments. High-interest debt usually comes in credit card debt, but some loans are high interest as well. When you pay off high-interest debt, you avoid paying more in interest. This frees up money towards saving or investing. So it’s one of the best things to start with your saving and investing strategy.
Max out your retirement account
This is where you should invest first: max out your retirement account. If your employer offers a 401(k) match, make sure you maximize your contributions here. This typically means your employer will match your contributions to your retirement account to a certain point.
You want to take advantage of this perk and maximize your investment here. Suppose your long-term goals include a comfortable retirement, and you have maxed out your contributions to retirement accounts like a 401(k) or IRA. In that case, you may want to explore additional investments.
Weigh the risks of investing
Investing has more risk compared to saving. But with this risk, you can experience much more reward. Your investments can grow over time in more significant ways, but they can also just as quickly shrink.
With savings, you will not have as large of potential returns. Your savings will accrue a small interest, but you won’t lose your savings account balance. A good option is to do both so that you can have higher-risk and lower-risk strategies working together.
Find investing experts you trust
There aren’t savings advisors like there are with investing. Most investing is done with the help of a brokerage or advisor. This is because investing comes with many more options and decisions.
Finding someone that you trust is key. This person should have the same alignment of values to make decisions on your behalf that fit your best interests.
Have a long-term strategy for investing
Investing should be done with at least a five-year plan. Ideally, your investing strategy should be even more long-term. This is because day-to-day investing can be volatile.
But it does seem to level out over time, as long as you have the right strategy. So, think of investing as something to do over a long period. Your money is also not liquid while you’re investing, so it’s best to think of it as put away indefinitely.
Save and invest for a better financial future
A well-rounded financial strategy includes both saving and investing. The key is to find the right balance of both. Whether you are saving or investing, make sure you have a plan in place to reach your financial goals.
Is a savings account considered an investment?
Typically, a savings account is not considered an investment. You can earn interest when your money is in a savings account, but it is not the same potential (or risk) as true investing.
What is the importance of savings and investment?
Saving and investing both grow your money over time. Both should be done together as a complete financial strategy.
How early should I save and invest?
As soon as you can! The earlier you start saving and investing, the more your money can grow over time.