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Saving vs Investing: Which Is Right for You?

Saving vs Investing: Which Is Right for You?
Austin Kilham
Austin KilhamUpdated January 25, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
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 in a savings account. Investing refers to taking some risk and buying assets (like stocks or shares in a mutual fund) that may increase in value over time.Which tool to use when will depend on your budget and your financial goals. Fortunately, you don’t have to choose one over the other — you can 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 can hold it until you need it. Savings accounts pay interest on your deposits, expressed as an annual percentage yield (APY). While returns can be low (ranging anywhere from around 0.01% APY to 4.00% APY), there’s virtually no risk involved. The Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA) insures savings accounts up to $250,000 per account holder, per institution, should the bank or credit union fail.Another plus of savings accounts is that money is liquid (meaning you can 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 can still cap the number of withdrawals you’re allowed to make and charge fees if you exceed the max.Recommended: What Is a Sweep Account?

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 can set you back — and if it causes you to rely on expensive debt, 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, returns are guaranteed.Recommended: Guide to Opening a Savings Account Online 

Places to Put Your Savings

There are several different types of savings accounts you can 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 13 to 17 times more interest than the national average of traditional savings accounts. They typically also have low or no fees. Other than that, these accounts function like regular savings accounts. You can manage your account online or via mobile banking, and will typically have access to a wide network of 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, such as six, 12, or 18 months. If you withdraw your funds before the CD matures, you’ll 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 can find money market accounts at credit unions and traditional and online banks. Recommended: How Much Does the Average American Have in Savings? 

Investing Your Money

Investing involves buying assets, such as stocks, bonds, or property, that you hope will increase in value over time. However, there’s no guarantee that they will. 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. According to Fidelity, the average annual return on stocks over the past decade has been 13.8%. That kind of return, however, isn’t guaranteed.You can generally buy and sell investments at any time, though it can take a few days 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 can 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 can 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 can 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. After all, this is free money.
  • An IRA If you don't have access to a 401(k), you can likely 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 can normally 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.
  • Brokerage account A brokerage account is an investment account you can 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”).
Recommended: 401(k) vs Savings Accounts: a Comparison

Difference Between Saving vs Investing 

SavingInvesting
Best forEmergency savings; goals that are less than 5 years offMedium- to long-term goals
RiskVirtually noneRisk involved
ReturnsLow, but guaranteed (may not beat inflation) Potentially high, but not guaranteed
AccessibilityImmediateWithdrawals may take a few days or longer and have other restrictions
The biggest difference between saving and investing is risk. Thanks to federal insurance, you can’t lose your money (up to $250,000) in a savings account, even 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 can 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 can take some time before proceeds from the sale hit your account. When you sell stocks, for example, it can often take two business days to receive your money. With retirement accounts, withdrawing money before you turn 59 ½ will often trigger a penalty fee, but there are some exceptions that avoid the penalty.Recommended: High-Yield Savings Accounts vs Certificates of Deposit (CDs)

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. However, for some people like self-employed people it may be 12 months. 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’ll 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 (like buying a car or 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 can 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 — like 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.

Frequently Asked Questions

Is it better to save or invest?
Which is riskier, saving or investing?
How much money is common to save before investing?
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About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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