Navigating financial options: Savings accounts vs. investing

Quick insights

• Savings are primarily for certain financial goals and emergencies, while investing is aimed at long-term growth and wealth management.
• Savings accounts generally offer a place to store money you might need to access quickly.
• Investing involves putting money into assets that have a potential to increase in value over time.

Savings might bring to mind a piggy bank, cash inside a mattress or a type of bank account—money is set aside for another day. Investing is more about allocating your money with the hope of it accumulating value over time. Learning how to use both savings accounts and investments effectively starts with understanding the differences.

What is the difference between saving and investing?

One of the main differences between these financial options is in their purposes. Savings often suit specific financial needs, goals and safety. Investing is typically geared towards long-term growth and greater potential returns, but involves higher risk. Here are more specific areas that distinguish saving vs. investing:

Purposes of savings and investments

• Savings: This is setting money aside so that you don't spend it. People usually save for a specific purpose or goal, such as a down payment or to build an emergency fund.
• Investing: This is an attempt to use or spend money in a way so that it is worth more at a later time. People invest in assets like stocks, real estate and other valuables when they believe those assets could grow to be more valuable.

Access to money

• Savings:  Accessibility to money—you can typically get to the money in a savings account when you need it. If you have a linked checking account, you can make transfers conveniently.  If you need cash, you can withdraw it. Some accounts have limits on these transactions, and fees could be charged for exceeding the limits.
• Investing: Varying levels of access—it depends on the type of account, but investment accounts can tie up your money for a long term if you hope the value to increase. Retirement accounts, for example, restrict when and how much you can withdraw.

Returns

• Savings: Many financial institutions offer an annual percentage yield (APY) on a savings account. That means interest is paid on the money in your account at the APY. Other types of savings include a certificate of deposit (CD), which also earn interest if the money is withdrawn at the maturity date.
• Investing: The premise of most investments is to provide a means for money to grow. Opportunities include property, stocks, bonds and mutual funds, among others. Investing in any mix of assets could offer returns over time, steadily or exponentially; however, returns aren't guaranteed, including possible loss of initial investment.

Security

• Savings: Money kept in savings accounts at certain financial institutions may be insured by the Federal Deposit Insurance Corporation (FDIC). This means that if the bank fails, the FDIC will reimburse depositors up to the maximum amount allowed by law.
• Investing: Investments are not insured and can lose value. There's no guarantee of returns, and that's the inherent risk of investing. Once you use money to buy assets, value will likely fluctuate over time.

Complexity

• Savings: More straightforward—opening and maintaining the account boils down to deposits, withdrawals and transfers. These few transactions are needed to manage your money, regardless of your goals and needs.
• Investing: More complex, as the benefits often depend on your knowledge of markets, assets and risk management. The learning process can be gradual, and you can make a wide range of adjustments to your strategy as you go.

Is it better to have a savings account or invest?

It depends on your savings plan, but savings are often the suitable priority for most people despite the potential upsides of investing, which can result in short- and long-term growth. Savings accounts offer stable paths toward financial milestones, such as buying a car, a house or simply having the money to pay for unexpected expenses. Investments can have very variable rates of return.

Saving money and investing are both worthwhile pursuits because both can create financial health, security and growth. Therefore, a mix of savings and investments can keep you financially stable while aiming at long-term growth.

How to balance savings and investments in your financial plan

To balance savings and investments, start by building an emergency fund. Then, set your financial goals, assess your budget and be honest about your tolerance for risk. When you're ready to take aim at investing, research your options and decide how to allocate money. In general, you can adjust your mix of savings and investments as your goals and financial situation changes.

In summary

Savings help you meet specific needs and goals, while investing is more of a long-term pursuit to accumulate wealth. Given the range of investment options and potential returns, savings are good to have in order—at least as an emergency fund.

When trying to choose between saving and investing, remember that you can change your strategy over time. Constantly learning about your situation, options, and then making adjustments can build long-term financial well-being.