Savings vs. Investing - Part 1

Saving vs. Investing – Part 1

Written by Nathan Woolard

Part One of a three-part series

Saving and investing tend to be used interchangeably.  While both involve putting money aside for future objectives, there are key differences between the two.  Used separately or together, both can be important strategies to build long-term wealth.

The key differences fall into these categories:  product type, time horizon, liquidity, return, and risk.

Product type:  If saving is your aim, savings accounts, money market accounts, and CDs (certificates of deposit) will be your products of choice.  If investing is your intention, you’ll be looking at products such as stocks, bonds, mutual funds, and ETFs (exchange-traded funds).  

Time horizon:  If you plan to use the money within a year or two, or if you want to use it as an emergency fund, saving is the way to go.  If you can live without the money for at least 3-5 years, investing could be for you.

Liquidity: Liquidity is defined as the simplicity with which an asset can be converted into ready cash and still maintain its value.  The money you deposit in savings accounts, money market accounts, and CDs can typically be withdrawn from immediately, although you may incur a penalty for accessing a CD before its maturity date.  Money you have invested is also highly liquid, but you may not get the exact amount you put into it depending on when you cash it in.  

Return:  Return refers to the profit or growth of your deposit or investment over time.  While you will earn interest when putting money in savings accounts, money market accounts, and CDs, it will generally earn a lower return than money invested in stocks, bonds, mutual funds, and ETFs.

Risk:  There is virtually no risk to depositing money for saving, as savings accounts, money market accounts, and CDs are insured by the FDIC.  As for money you have invested, returns are not guaranteed.  You could lose money as the market fluctuates.

While both have situational advantages, neither saving nor investing will always be the best option.  Your current financial position, as well as your short and long-term needs and goals, will determine the right choice for you.  For more specific information on saving and investing, watch for parts 2 and 3 of this series coming soon.