Investing Versus Saving: Which Should You Do, When, and How?
Plus, find out why these two practices makes a big difference in your overall financial health.
A little planning can go a long way when you're getting your finances in order. And while saving money and investing it can help ensure a better financial future, there are times when it's smarter to save instead of invest, and vice versa. "Savings is best for reaching short-term goals, such as building an emergency fund or planning an upcoming vacation, and exposes you to minimal risk, if any," says Scott Cohen, a financial advisor at Northwestern Mutual. "Investing is better for long-term goals, such as saving for retirement, college, or your future home, because they offer more risk but can provide a greater chance at reward down the line."
Interested in improving your financial health but not sure whether investing or saving is right for you? We asked a handful of financial advisors to help us break down the differences between the two, as well as the best ways to do each, so you can manage your money.
When to Build Your Savings Account
According to Chanelle Bessette, a banking expert at NerdWallet, a savings account is a vital tool in your financial arsenal. "It's a place to keep money as liquid cash that you need to access quickly or for short- to medium-term goals, such as building an emergency fund, saving for a housing down payment, or funding a special vacation," she explains. "Many banks allow their customers to create sub-accounts, which can be helpful for separating savings based on different goals. The sooner you start building up your savings, the sooner you can have money set aside for life's important—and sometimes unexpected—moments."
How to Bulk Up Your Savings Account
Building up your savings account can be as simple as depositing a certain amount of money each month. "Automate your savings so a portion of your paycheck goes directly into your savings account," advises Cohen. "Try to increase what you contribute to your savings account when your pay increases."
Bessette says the type of savings account you open can help you bulk up your balance, too. "Aim for a high-yield online savings account with no monthly fees," she explains. "These accounts offer rates much higher than the 0.05-percent national average interest rate and can make a sizable difference in terms of earnings."
When to Invest Your Money
While investments such as stocks, bonds, and real estate are much more risky than simply saving your money, Cohen says they provide the opportunity to increase the value of your money over time. "When you invest, you can grow your money at a faster rate than traditional savings," he explains. "If you have a solid financial foundation in place, or if you have inherited some money or have extra money saved up, you can likely afford to choose some investment vehicles with higher risk."
However, Cohen says it's also important to note that unlike a savings account, investments are subject to market fluctuations, so you have the potential to lose money, too. "In general, the more risk involved with the investment, the more potential reward in the long run," he says.
How to Invest Your Money
When determining how to invest your money, Shannon McLay, founder of The Financial Gym, says exchange-traded funds (ETF) and mutual funds are a great place to start. "ETFs are traded on exchanges, such as the S&P 500, and when you invest in one, you can buy and trade it yourself without a fund manager," she explains. "A mutual fund, on the other hand, is typically managed by a brokerage, like Vanguard, and the price can vary depending on when you purchase it."
To maximize your investments and reduce your chances of losing money, Cohen recommends talking with a financial advisor about all of your options before investing. "They can walk you through your risk tolerance (how much risk you are willing to take with investments), time frame, and what routes to take when investing," he explains. "Discussing stocks, bonds, mutual funds, 401k match plans, and other investment opportunities can help you decide how to put a portfolio together."
Saving or Investing: Which Should You Do?
As for which is the smarter money move to make, saving or investing, Bessette says it all comes down to your current financial situation. "Investing and saving are both highly valuable means of achieving financial goals," she explains. "The place you decide to put your money depends on your timeline, your risk tolerance, and what kind of return you hope to get on your cash."
To reap the most benefits from saving or investing, Tiffany Lam-Balfour, an investing expert at NerdWallet, recommends doing a combination of the two. "To have a sound financial strategy, you should be saving and investing so you can reach both long and short-term goals, while handling a variety of situations throughout life."