Saving vs. Investing: What’s Best for Your Financial Goals?
Disclaimer: This blog is for informational purposes only and is not investment advice. Please consult a licensed financial advisor for guidance tailored to your individual circumstances.
With all of the different financial strategies and products out there, it’s difficult to determine which ones are the best for reaching your financial goals. You’re probably familiar with saving and investing, but you may not know the differences between them. Each has its own benefits, and understanding them can help you make smart, strategic decisions about how to manage your money. Read on for a breakdown of saving and investing.
Note: For a breakdown of the different investment strategies, refer to the Financial Industry Regulatory Authority (FINRA) website.
What is Saving?
When people save money, it’s usually for one of two reasons. The first is to set aside money for a future purchase, usually in the short term. The second is to build an emergency fund to prepare for unexpected expenses. At its core, it’s a healthy habit everyone should form. It’s about balancing how much you make and how much you spend. After all of your necessities are covered, what you do with the leftover money can make a huge difference in your overall financial picture. That’s where saving comes into play.
What is Investing?
While saving money is about setting it aside, investing money is about setting it up to grow on its own. At the core of investing is building wealth. Instead of simply putting money in an account to use later, you’re putting money into an account with the intention of growing it, usually at a faster rate. While money in a savings account often yields interest, the growth that happens in a savings account is generally not as significant as the growth that can happen in an investment account.
Many people refer to money in an investment account as money that “works for you.” While money you deposit into your savings account is mostly money you’ve earned by working hard, money in an investment account is that same money plus more that has worked by itself to generate more (depending on market conditions). There are several types of investment accounts and investment products available to help you meet your specific goals. If you’re unsure where to start, do some research on the FINRA website or read our beginner’s guide to investing for some definitions of key terms.
What are the Pros and Cons of Each?
While investing and saving are both designed for you to secure your financial future, they come with their own benefits and drawbacks. With savings, there’s no risk of losing money, since it isn’t subject to market fluctuations and it’s insured (usually by the FDIC), and it’s easy to access your money when you need it. However, savings accounts are usually much slower to grow than investment accounts.
On the other hand, investments carry the risk of losing some or all of your money, depending on the investments in your portfolio and market conditions, and it can be difficult to access money, especially if you have low-liquidity investments. However, investing is a great way to grow your money, usually quicker than in a savings account (depending on market conditions), and passively generate additional income. In general, anything that’s higher risk can yield a higher reward. The same is true with investing; it’s higher risk, but there’s also a greater potential for higher returns.
When to Prioritize One Over the Other
Figuring out when to prioritize one over the other is where many people tend to get confused. Savings is best for short-term goals, usually within the next five years. Due to the low-risk nature and accessibility, saving is your best bet when you need to use the money sooner. For the same reasons, you should place money for emergencies in a savings account, since you may need to access it at a moment’s notice.
On the other hand, for long-term goals beyond five years, like buying a house, paying for a child’s college education, saving for retirement, starting a business, or leaving something behind for your family, investing can be beneficial. Since investing is higher risk than saving and is subject to market fluctuations, using it for long-term goals gives you more time to grow your money and recover from potential market downturns.
How Can AutoPayPlus Help You on Your Financial Journey?
Now that you understand the difference between saving and investing and when to prioritize each, it’s time to think about how to secure your financial future. AutoPayPlus supports you on your financial journey by helping you become debt-free sooner. The less you have to pay creditors, the more you can pay yourself. With biweekly payment plans, you can pay off debt faster, freeing up funds for you to start saving more and investing sooner. Learn more about our payment plans and the services our 500,000+ Members have enjoyed by visiting our website.
