The main difference between saving money and investing is the amount of risk involved. Money in a savings account usually has a guaranteed return through interest earned. Investing gives you the potential to earn more, but the risk could be higher.
Let's examine how the differences between saving and investing can affect your financial strategy.
What is saving money?
In a savings account, you can earn interest on your money while keeping it easily accessible. A savings account is generally best for short- and medium-term goals, like saving for a down payment on a car or building an emergency fund.
Here are some common types of savings accounts:
- Standard savings accounts: These are offered by most banks, allowing you to earn a little interest while having easy access to your money.
- High-yield savings accounts (HYSAs): HYSAs can offer a higher interest rate than standard savings accounts.
- Certificates of deposit (CDs): CDs lock your money away for a set period – usually a few months to a few years – in exchange for a fixed interest rate that is usually higher than a standard savings account. There may be a penalty for withdrawing your money early.
Benefits and drawbacks of savings accounts
As with any financial product, savings accounts can come with benefits and drawbacks. Benefits can include:
- Low risk: Depending on the institution and the balances in your accounts, your savings may be insured up to FDIC limit.
- Easy access: You can usually access your money quickly without penalties. Keep in mind that some savings accounts limit the number of transactions you can make per month, and CDs may have withdrawal penalties.
- No or low fees: Savings accounts may come with low or no fees, depending on your bank and account type.
- Guaranteed returns: You can earn guaranteed interest on your money.
Drawbacks of savings accounts can include:
- Low returns: The interest you earn on savings can be minimal.
- May not keep up with inflation: The interest earned may not match inflation.
What is investing?
When you invest, you use money to buy assets, such as stocks, bonds or real estate. Investing involves risk – there’s no guarantee that your investment will grow, and you could lose all or part of what you invested. However, investing also offers the potential for higher returns.
Investments can range from low-risk options like bonds to higher-risk ones like stocks. Common investment vehicles include:
- Stocks: When you buy stocks, you buy a share in ownership of a company. These can go up or down in value over time.
- Bonds: Bonds are loans made, usually to a government entity or company, that earn interest over time.
- Mutual funds and exchange-traded funds (ETFs): ETFs and mutual funds are collections of individual securities (such as stocks and bonds) bundled together.
Benefits and drawbacks of investing
Investing comes with pros and cons. Benefits can include
- Potential for higher returns: Investments like stocks can offer the potential for significant growth over time.
- Liquidity: Many investments can be easily sold when needed, although the value may fluctuate.
- Potential to beat inflation: Investments can outpace inflation over time, helping you grow your net worth.
Some drawbacks of investing can include:
- Risk: There’s no guarantee you’ll make money from investments. It’s possible to lose all or part of the money you invested.
- Complexity: Investing requires research and understanding of the markets, which can be overwhelming for beginners.
- Fees: Some investments come with management or transaction fees, which can affect your returns.
Deciding when to save and when to invest
Both saving and investing can play important roles in a strong financial strategy. Deciding which to prioritize depends on your financial goals, risk tolerance and timeline.
When to have a savings account
A savings account is best when you need easy access to your money or are working toward short-term financial goals. Consider a savings account when you:
- Are building an emergency fund to cover unexpected expenses.
- Are saving for a big purchase in the short or medium term, like a vacation or a car.
- Need to keep your money accessible.
When to invest
Investing is ideal when you have long-term goals and are willing to accept some risk in exchange for higher potential returns. Consider investing when:
- You’re saving for retirement or other goals that are further in the future.
- You’re comfortable with the possibility of market fluctuations and temporary losses.
- You want to grow your wealth over time and potentially outpace inflation.
- You have adequate savings, including an emergency fund, and can afford to take on more risk.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
