You should save your money. You should also invest your money. Both will help you achieve your financial goals over time—assuming you do them regularly. But when you think about saving versus investing, what’s the difference?
Though they’re similar, there are some important distinctions. One, for instance, involves significantly more risk than the other. And that’s just a starting point. Below, we’ll discuss the differences between saving versus investing, and when and how you should do both—and you should do both!
Saving, at its core, means putting money in a safe place, and to protect it from risks. One of the biggest risks? That you might spend it on something outside of your budget!
Generally, when we talk about saving money, we mean putting it in a bank account—usually a savings account, rather than a checking account. In a savings account, the money will accrue interest and can sit there in perpetuity. Usually, we save money for a specific goal, like buying a car, a home, or maybe even an Xbox.
When you invest money, you’re putting it to work for you. You’re usually buying some sort of asset that you hope will increase in value in the future when you can sell it and make a profit. Your money is at work making more money.
You invest your money through a brokerage account, which allows you to buy and sell stocks, bonds, cryptocurrencies, ETFs, and more. The big difference? There’s a lot of risk involved with investing, and it can be enormously difficult to pick “winning” investments.
When you invest, your money is at the mercy of the market. The good news is that, throughout history, the markets have gone up—yes, there have been some serious drops and drawbacks, but the markets have always bounced back. So, while there is risk for investors in the short term, over the long-run, risk is somewhat minimal.
Saving vs. investing: Which should you do first?
Let’s say you have $1,000, and you want to save it or invest it. You can only do one or the other—which do you choose?
Your instincts may tell you to save. Depending on your specific situation, and assuming that you’re following the “golden rule” of money,” your instincts may be right! But that’s an important thing to remember: Whether you should save or invest will depend on the specifics of your financial picture. If you have absolutely no money in the bank, for instance, it may be best to save that $1,000 and have some liquid cash.
That cash can then act as a buffer—it’s all a part of your strategy for when things go wrong. And things will go wrong. Your car may break down, your paycheck may be late, or you may even get fired or laid off. You never know what’s going to happen.
In short, the only certainty in life is uncertainty. So, with that in mind, the first thing you should do is save up some money, and remember, that saving is relatively risk-free—if the bank loses your money somehow, it’s insured by the FDIC for up to $250,000, and it’s not at risk of losing a lot of value overnight as it would be if it were invested.
Further, building up some savings gives you an emergency fund, or rainy day fund, or as we like to call it at Money Vehicle, your “Corona Cushion.” A lot of people will understand why after having lived through the pandemic!
The goal should be to save up between three and six months’ worth of living expenses—that is, you could potentially go six months without any income—before you start to invest. After that, you can look at your investing options. But generally, most financial professionals will tell you that building up an emergency fund should be the first item on your financial to-do list.
Beyond that? You can also aim to pay off your debt (aside from a mortgage or student loans, which will take years), which can further free up money (read more about your “burn rate”) in your budget to invest. And if you want to know the easiest way to start investing? Sign up for your company’s 401(k), if they offer it, or start an IRA.
But to wrap it up, the difference between saving and investing really boils down to risk and liquidity.
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