Investing and saving both play a crucial role in building a better financial future.
Both habits contribute to building wealth. As you build a financial plan, you should understand the difference between saving and investing. Savings and investments are two different things and knowing the difference can help you create financial plans that work for you.
So how are they different? Let’s find out. Also, we’ll explore whether it matters!
What is the difference between saving and investing?
In the end, saving and investing both contribute to building your net worth and work toward your long-term financial goals. Investing and saving have dramatically different financial impacts, but they are separate actions.
The act of saving involves putting money aside for a future expense or goal. By building up your savings, you’ll have access to them quickly. As a result, savings are the best place for funds you need to be able to access quickly.
You could, for example, store your emergency fund in a high yield savings account or put money aside for the purchase of a new laptop. Investing, however, involves more risk. Although you are also saving these funds for the future, there are more risks involved.
As a result of this higher risk, you expect a higher rate of return.
Every action you take impacts your financial future. Your savings and investment accounts should be built simultaneously. At different points in your financial journey, you should prioritize saving and investing.
This depends on the goals you have for your financial future. But both investing and saving are important.
We’ll look at the benefits and drawbacks of saving and investing in greater detail.
Pros and Cons of Savings.
Your financial plan doesn’t end with savings, but it does begin with a plan for saving. If you want to build up your savings, you should act now.
The biggest difference between savings and investment is that saving is low risk.
Pre-determined interest rates.
When you start a savings account, you’ll know what amount of interest, if any, you will earn on the funds. If the APY changes, you will be notified. A high yield savings account could help you tap into the best interest rates available. Take some time to explore the options available to you.
This should make it easy to access the funds you need. On the other hand, this quick access may serve as a double-edged sword. When we shouldn’t dip into savings, we do.
Quick to start.
Savings accounts require little knowledge of finance. Getting started should typically take less than a few minutes. Saved funds can be used to fund expenses quickly and with a low level of risk.
Disadvantages of savings.
Of course, there are some disadvantages to saving. Here’s what you need to know:
Another big difference between savings and investment is the amount of return. Savings are low risk, which means they come with low returns. Although these rates are pre-determined, they will often be lower than potential earning with an investment.
If the returns are too low, then you might lose purchasing power over time due to inflation. That slowly erodes the value of your dollar.
Low returns and the risk of inflation discourage many from keeping too much of their net worth tied up in savings.
Pros and cons of investment.
Investments help to build wealth faster, but they do come with their own set of pros and cons. Let’s dive in.
Here are the advantages of investment that you should consider:
Potential for higher returns
Again, the difference in savings and investment is the amount of return you will earn. The historic returns of some investments point to higher returns. For example, large stocks have returned an average of 10% per year since 1926.
Of course, past performance is not a guarantee of future success. But these historic returns provide the promise that you can grow your funds with the help of investments.
Potential to beat inflation
Inflation eats away at purchasing power. But investing could help you stay ahead of the curve. With the potential for higher returns, you may be able to prevent inflation from destroying your purchasing power. Investing has many potential upsides to help you grow your funds.
Disadvantages of investment
Although there are significant advantages to investing, there are some drawbacks to consider. Here are a few cons to investing:
No guarantee of returns
Investments can fluctuate in value. If you’ve looked at the stock market lately, you’ll quickly realise that there is inherent volatility tied up in this investment choice. Although there are investments with less volatility involved, the returns are never guaranteed. So, you could lose money along the way.
You might even lose money
A big difference in savings and investment is the risk of losing your money. Depending on your investment, you might lose money instead of gaining money.
All investments come with some amount of risk that you might lose your funds. Some investment comes with more risks than others. However, you need to be comfortable with the risks you are taking.
You will need to spend some time learning about your potential investment options to choose the right one for your future. Depending on your inclination, this may take some time. Luckily, we can help get you started.
You’ll find more fees associated with your investments. Before choosing any investment, consider the number of fees involved. If you go a DIY investment route, you can avoid many of the fees charged by financial advisors. But you’ll still encounter fees embedded into your investment choices.
Remember, there are no guarantees when it comes to investing. However, don’t let that scare you from investing your money, just be aware of the risks and invest based on your risk tolerance, so you can still put your money to work.
When should you save?
The difference between savings and investment matters. But when should you choose to save or invest?
If you are just beginning your financial journey, then saving will likely be the priority. The first steps you should take include paying off any high-interest debt and building up an emergency fund.
Beyond that, savings should be used to meet specific financial goals. For example, you might use a sinking fund to save up for a new car. Or decide to save up for that vacation you’ve been waiting for. Saving is the perfect way to accomplish short-term financial goals.