INTRODUCTION

SAVING is a way of putting money aside for any expense or goal you would need in the future, like an emergency fund, vacation, paying for a car or house down payment, etc. Risk is low when you put money in a bank account or CD.

INVESTING is a way to put aside money to earn a higher return associated with a certain level of risk. Investing could be done in different sectors like stocks, bonds, Index Funds, Exchange Traded Funds (ETFs), Mutual Funds, businesses, real estate, etc. No need to worry if you are new to these terms; we will familiarize you with those pretty soon. Strap your belts for the next blog posts. 😉

When it comes to money management, both saving and investing play a crucial role. Each has its risk levels; you can choose based on your requirements or goals. Both are not the same thing. So, you need to know the difference between saving and investing. If you are new to money management, knowing when to save or invest might be difficult. This blog helps you with this.

RISK PROFILE

Savings and investing can be differentiated by the risk level attached to your money. Savings are low risk compared to investing, but the rate of return for the capital invested would be minimal. Whereas investing could be risky for a better return rate on the capital instead of losing money to inflation. Savings are less risky because the money in your savings/bank account does not decrease unless you withdraw those funds. Banks are offering 2-4% interest for High-Yield Savings Accounts or CDs in 2022 (Dec 2022) due to the higher interest rates. The current inflation rate stands at 7.1% in the United States, and with 4% interest, you are typically losing money to inflation when not invested.

It is recommended that saving your “Emergency Fund” money in a bank account would be better. And it needs to be somewhere you can withdraw your funds immediately rather than waiting for a certain period. There is a blog post about the Emergency Fund, which you can refer to if you need some insight (you could learn something new and helpful on your journey). Ex: If you have a large amount of money sitting on the sidelines, you can also use offers present in the market like Chase savings account – they generally give $100-300 for $15,000 invested for 90 days or Discover HYSA, which gives you $200 for $25,000 invested, etc.

And with investing, you’ll be investing your money through investment or brokerage accounts like Robinhood, WeBull, E*Trade, Vanguard, Fidelity, etc. With investing, it would be better to research the businesses/companies you want to invest in. It would be better to hold your investments for at least five years or more to see good returns. The market could be volatile in the short term, but eventually, it does stabilize and generate a good rate of return on your investment if done correctly. One thing to remember is to invest the money you wouldn’t need right away or in the near future for emergencies or expenses.

So, it would be better to decide according to your goals. Savings would be good for the short term and could be liquidated easily whenever there’s an emergency or unplanned expense. Investing would take a longer time to generate a higher rate of return. This could help you fund your retirement, etc.

SAVINGS VS INVESTING CALCULATOR

For example, consider a person with a starting amount of $10,000, an additional contribution of $100 annually with a 2% rate of return would have $22,170 in 30 years.

 

Consider the same example with an 8% return, which would yield a whopping $111,955 in 30 years. That’s the power of investing and compounding.

 

SAVINGS ACCOUNTS OR TOOLS

1. HIGH-YIELD SAVINGS ACCOUNTS

A savings account offered by a bank allows you to set money aside, which earns interest as you go. You can earn up to 4-6% interest at the time of writing this blog post. Various online savings accounts offered by Ally, SoFi, American Express, Discover, etc., offer better interest rates than mere pennies offered by traditional banks.

2. CERTIFICATE OF DEPOSIT (CDs)

CDs offer a higher interest rate on your money. But the money is stuck for the term of the CD in exchange for a higher interest rate. You won’t be able to withdraw your funds before the term is done. There could be exceptions to withdraw, but generally, they are associated with interest penalties.

3. MONEY MARKET ACCOUNTS

Money Market account is an interest-bearing account at a bank or a credit union. This is like a savings account but requires a higher minimum balance to open than a typical savings account for earning a high interest rate.

INVESTMENT ACCOUNTS OR TOOLS

1. BROKERAGE ACCOUNTS

You can choose from various brokerage accounts, like Robinhood, WeBull, E*Trade, Fidelity, etc., to invest in stocks, ETFs, index funds, etc. Currently, most brokerages offer commission-free trading.

2. INVESTING APPLICATIONS 

Acorns and Stash make it easy for people to start investing. You can start investing as little as $1 with Stash, and Acorns invests your spare change from transactions you made using credit and debit cards. They generally charge a monthly fee, which you must be aware of.

PROS AND CONS OF SAVING VS INVESTING

Below, we are going to dive deep into the pros and cons of savings and investing:

PROS of SAVINGS

1. The amount of money stored in your bank account does not decrease if you don’t withdraw your funds.
2. If you have a goal in mind, divide the money you need by the time frame in months, giving you the amount to be saved monthly.
For example, if you need to save $10,000 for a vacation next year and have 10 months, divide $10,000 by 10 months = $1,000. You would have to save $1,000 each month to reach your goal of $10,000.
3. You would know how much interest you will earn on the saved money.
4. The Federal Deposit Insurance Corporation (FDIC) insures money in a bank account for up to $250,000. So, the money is relatively safe even though the return is less.
5. You can withdraw the funds whenever there’s an emergency. Bank accounts are easily accessible, and money can be withdrawn from anywhere.
6. You don’t have a learning curve for savings. Bank accounts can be set up easily, and you can start saving money for your goals.

CONS of SAVINGS

1. The rate of return is low. You would earn much less compared to investing.
2. Inflation would reduce the purchasing power of the money saved. Practically, it is losing money when considered in the long term. Due to inflation, you must save more money to reach your long-term goals.

PROS of INVESTING

1. Investing makes your money work hard for you to make more money. You can earn a higher rate of return on your money compared to savings accounts or CDs. If you are investing in index funds that track Standard & Poor’s stock index, like SPY or VOO, you could earn a 9-10% annual rate of return in the long term.
2. You can choose various options when it comes to investing according to your risk appetite. You can choose from stocks, bonds, ETFs, mutual funds, real estate, rental properties, etc.
3. Investing your money in a diversified portfolio of stocks, bonds, and real estate could easily beat inflation, which, in turn, increases the purchasing power of your money.
4. The magic of compounding happens when you reinvest the money you receive from your investments. This could pay you huge over long periods of time. We can go over compounding in another blog post.
5. Investing helps you with longer goals like retirement, a child’s education, etc.

CONS of INVESTING

1. Higher level of risk compared to savings.
2. There is a possibility of losing all your money if not done right.
3. Investing involves a learning curve. Research before investing your hard-earned money will take some time and effort from your end.

COMPARISION TABLE: SAVINGS vs INVESTING

Hope this blog post clarifies your questions about savings and investing. 🙂

This is just a TIP of the iceberg. We are going to dive deep into various aspects of investing. Stay tuned for more…..!!!!!