Saving vs Investing: Which Is Right for You?

Savings and investing are both strategies that help you accumulate money for the future. While the terms are often used interchangeably, there are some key differences between saving and investing. 

Saving means putting away money for later use in a safe place, such as a savings account. Investing refers to taking some risk and buying assets (such as stocks or shares in a mutual fund) that may increase in value over time.

Which tool to use when may depend on your budget and your financial goals. Fortunately, you don’t have to choose one over the other — you may do both at the same time. Here’s how.

Saving Your Money

Saving money entails putting your extra cash in a safe place, typically a savings account at a bank or credit union, where you hold it until you need it. 

Savings accounts pay interest on your deposits, expressed as an annual percentage yield (APY). While returns may be low (ranging anywhere from around 0.01% APY to 5.00% APY), there’s virtually no risk involved. The Federal Deposit Insurance Corporation (FDIC) and National Credit Union Association (NCUA) insure eligible deposit accounts, including savings accounts, up to $250,000 per depositor, per insured institution, per ownership category if the bank or credit union fails.^,

Another plus of savings accounts is that money is liquid (meaning you may access it when you need it). The funds in a savings account aren't, however, quite as accessible as the funds in your checking account. Savings accounts don’t come with checks or a debit card. And, there may be monthly withdrawal limits. While federal rules restricting savings account owners to six withdrawals per month have been suspended, banks and credit unions may still cap the number of withdrawals you’re allowed to make and charge fees if you exceed the max.

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Common Reasons to Save Your Money

It’s generally a good idea to choose saving over investing if you don’t yet have an emergency saving fund. A good rule of thumb is to have at least three to six months’ worth of living expenses set aside in a savings account in case of the unexpected, such as an unforeseen medical bill, an expensive car or home repair, or a job loss. Without a cushion of savings, a financial emergency may set you back — and if it causes you to rely on expensive debt, it could have long-term repercussions.

Saving also makes sense for financial goals you want to accomplish within the next few months or years, such as going on vacation, buying a car, or paying for a wedding. Since these are short-term goals, you don’t want to take any risks with your money. With a savings account, your principal is generally protected.

Places to Put Your Savings

There are several different types of savings accounts you may choose for your emergency fund and short-term goals. Here are some to consider.

Traditional savings account: Offered by banks and credit unions, people often open these accounts at the same institution where they have their checking accounts. The APY is often lower than it is on other types of savings accounts, though, and there might be a monthly maintenance fee. 

High-yield savings account: Offered by credit unions and online banks, high-yield savings accounts generally pay 10-15 times more interest than the national average of traditional savings accounts. They typically also have fewer fees. Other than that, these accounts function like regular savings accounts. You usually manage your account online or via mobile banking and may have access to fee-free ATMs.

Certificates of deposit (CDs): Available at banks and credit unions, this type of savings account comes with a fixed interest rate that’s typically higher than a regular savings account. In exchange for the higher APY, you must agree to leave the money untouched for a set period of time, generally ranging from three months to five years. If you withdraw your funds before the CD matures, you typically pay a penalty. 

Money market account: These savings accounts offer some of the features of a checking account, such as check-writing privileges and debit cards, making them a type of hybrid account. Money market accounts typically pay a higher APY than regular savings accounts, but often come with higher initial deposit requirements, along with higher ongoing balance requirements to avoid fees. You may find money market accounts at credit unions and traditional and online banks. 

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Investing Your Money

Investing involves buying assets, such as stocks, bonds, or property, that you hope may increase in value over time. However, there’s no guaranteed outcome. So, investing inherently comes with a certain amount of risk, including the risk that the assets could go down in value.

If you don’t need the money for a while, though, investing tends to beat saving in its return potential. The average annual return on U.S. stocks has been about 11.5% over the past 40 years. Of course, that kind of return is not guaranteed.

You may generally buy and sell investments at any time, though it might take a day or two to have access to the money. However, you may not want to sell during a market downturn. As a result, you generally want to view investing as a long-term growth strategy. 

Reasons to Invest Your Money

Investing may be a particularly useful tool when you’re saving for large, long-term goals, such as retirement or a child's college education. Certain types of investments, such as traditional 401(k)s, individual retirement accounts (IRAs), and 529 college savings plans, also offer tax advantages.

Investing vs. saving may also make sense for any financial goal that is five or more years away. A longer time frame helps you ride out the ups and downs of the market and may allow your savings to recover from market drops. 

Where You Might Invest Your Money

Often, a good way to start investing is through a retirement account. Once you’re making contributions to your retirement, you may want to look at nonretirement investing. Here are some options to consider.

• A 401(k): If you have access to an employer-sponsored 401(k), check to see if they offer contribution matches. This means that for every dollar you contribute to your 401(k), your employer contributes a certain amount, too, typically up to a specific limit. If your employer offers matching funds, it’s often a good idea to contribute at least up to the match as soon as you can.

• An IRA: If you don't have access to a 401(k), you’re likely able to set up a traditional IRA through a financial institution. Retirement accounts are typically made up of a mix of investment types such as stocks, bonds, and mutual funds. You may generally set up your own ratio of these investment types or choose a target date fund, which is an investment mix that's optimized for your anticipated retirement date. Remember to consider your investment objectives and risk tolerances when making this decision.

• A brokerage account: A brokerage account is an investment account you may open directly with a brokerage firm that lets you buy and sell some types of investments with the money you deposit into the account. The firm places investment orders on your behalf and executes trades, and typically collects a commission. There are generally two main types of brokerage accounts: full-service (which comes with some type of financial guidance) or online (which you basically manage yourself or with help from a “robo-advisor”).

Difference Between Saving vs Investing 

The biggest difference between saving and investing is risk. Thanks to federal insurance, you generally won’t lose your money (up to $250,000) in a savings account if the financial institution were to go out of business. With investing, the assets you purchase could potentially lose value.

Another difference: How quickly you’re able to access your money. While you may be limited to six withdrawals per month from a savings account, the money is accessible. It’s also quick and easy to transfer money from a savings account to a checking account, even if the checking account is held at a different institution. 

If you want to access money that’s invested, on the other hand, you generally have to sell your assets, and it may take some time before proceeds from the sale hit your account. When you sell stocks, for example, it might often take two business days to receive your money. With retirement accounts, withdrawing money before you turn 59½ may often trigger a penalty fee, but there are some exceptions that avoid the penalty.

Deciding Whether to Invest or Save

In general, it’s a good idea to begin building savings before you dive into investing. If you don’t yet have an emergency fund, a good first step is to build up a cushion of savings that could cover at least three to six months’ worth of living expenses. That way, if unexpected expenses crop up or you were to lose your job, you wouldn’t be forced to run up expensive credit card debt that could take months or years to get out from under.

Once you have emergency savings, you may want to start automatically contributing a small portion of each paycheck to a 401(k) or IRA. If your employer offers matching funds, you should consider contributing at least enough to max out your employer’s match. 

As your income builds, you may want to start adding to both your savings and your investments. This might include maxing out your 401(k) or IRA contributions and saving for short-term money goals (such as buying a car or a home) in a high-yield savings account. Make sure to check contribution limits for retirement accounts.

If your savings timeline is longer than five years, you may want to open a brokerage account and invest the money in stocks or mutual funds. Too much in savings may lead to a loss of potential income earned through investing.

Recommended: Mutual Fund vs Savings Accounts

The Takeaway

Savings and investing serve different purposes, and many people do both at the same time. 

The stock market is geared toward long-term investments — money you don't need for at least five years. For shorter time frames, you generally want to stick to lower-risk options — such as a high-yield savings account.

If you’re looking for the best return on your savings, Lantern by SoFi can help. With our online banking marketplace, it’s fast and easy to compare high-yield savings accounts based on APY, fees, and balance minimums.

Lantern can help you compare online savings accounts and find today’s best rate.