What’s the Difference Between Saving and Investing?

What Does It Mean to Save Money?

Saving money means setting aside funds, ideally in an interest-earning account, that can help you pay for future expenses, meet your financial goals and provide a cushion that allows you to avoid going into debt when emergencies arise.

Building a strong emergency fund is an essential part of financial wellness (more on this in a minute). Another benefit of saving is that you can earn interest on your money. The following interest-bearing accounts are worth exploring:

• High-yield savings account: These accounts offer higher annual percentage yields (APYs) than traditional savings accounts. As of September 2024, some have rates as high as 5.30%.
• Certificate of deposit (CD): You'll make an opening deposit and then leave that cash in the account for a predetermined amount of time. When the term ends, you'll get your money back, plus interest. Early withdrawal penalties usually apply.
• Money market account: A money market account allows you to earn interest on your savings, but most come with a debit card or checkbook for easy access to your money.

Benefits of Putting Money in Savings

Most experts recommend setting aside three to six months' worth of expenses in your emergency fund. Doing so can:

• Provide peace of mind: If you experience a financial setback—whether it's a surprise car repair or a stint of unemployment—your savings can help see you through.
• Prevent you from accruing new debt: Instead of reaching for a credit card, you can draw on your savings and replenish those funds after the storm has passed.
• Earn interest on your savings: A high-yield savings account is a safe place to store your money—and your cash will earn interest while it sits in the account.

Learn more: Pros and Cons of High-Yield Savings Accounts

Risks of Putting Money in Savings

• Minimal returns: APYs on savings accounts usually lag behind investment returns over time. If you're saving for a long-term goal, like retirement, it's probably wise to invest a portion of your savings.
• Free withdrawals may be limited: Some financial institutions allow up to six free electronic transfers and withdrawals per month. You may be charged a fee for going beyond that.
• Potential fees: Be on the lookout for account maintenance fees and minimum balance requirements. These costs could eat into your savings.

Goals to Save Toward

Because they tend to have a shorter time horizon, these are some goals that are typically tied to savings:

• An emergency fund
• A down payment on a home or car
• Home renovations
• Starting a business
• Traveling

What Does It Mean to Invest Money?

Investing is when you buy assets with the hope that they'll increase in value. The goal is to sell them for more than you paid—and enjoy an investment return. Below are some common ways to invest:

• Stocks: Buying stocks gives you partial ownership in publicly traded companies. The stock market is constantly in flux, which means that risk comes with the territory.
• Exchange-traded funds (ETFs): Investors pool their money together to purchase baskets of stocks, bonds and other assets. ETFs trade like stocks.
• Mutual funds: These are similar to ETFs, but mutual funds aren't traded through stock exchanges. Some mutual funds have a fund manager; others are passively managed and may track a specific stock market index.
• Bonds: These are debt securities. When you purchase a bond, you're loaning money to whoever issued it. That may be a company or government entity. Risk is low, and returns tend to be modest.

Benefits of Investing Your Money

• Compound interest can go a long way: This is interest that's applied to your principal balance and interest you've already earned—and it can help your money grow exponentially over time. You can put compound interest to work by investing in stocks (including dividend stocks), bonds, ETFs, mutual funds and real estate investment trusts (REITs).
• Potential for long-term gains: Despite short-term market volatility, the stock market has had average annual returns of about 10% over the last century. That far outpaces APYs on savings accounts.
• Some accounts offer tax advantages: Your 401(k)s, individual retirement accounts (IRAs) and health savings accounts (HSAs) allow you to invest in a tax-friendly way. That may include tax-deductible contributions or tax-deferred growth.

Risks of Investing Your Money

• Market volatility: Stock values are consistently fluctuating—and they can swing up and down at a moment's notice. That could result in investment losses. Staying diversified can help mitigate investment risk.
• It may be difficult to access your money: If your money is invested in a tax-deferred account, like a 401(k) or individual IRA, you'll be charged a 10% penalty if you tap your funds before age 59½. That's on top of the taxes you'll pay.
• Investment gains are taxed: Expect to pay taxes on capital gains. The amount you owe will depend on your income, tax-filing status and how long you held the asset. That could add up to a large tax liability in retirement.

Goals to Invest Toward

Investment goals tend to focus on longer-term objectives since investing can be especially volatile in the short term. Investing goals include:

• Retirement
• College savings
• Growing your overall wealth
• Any other long-term financial goal that's more than five years away

When to Save vs. Invest

The good news is that you don't have to choose between saving and investing. It's possible to do both at the same time—and taking this approach helps you meet your short- and long-term financial goals.

Begin by asking yourself what you're saving for. Retirement is likely on your list, and investing in a 401(k) or IRA can unlock some nice tax perks along the way. If you're self-employed and don't have an employer-sponsored retirement account, you could opt for a solo 401(k). Retirement aside, you can also invest in a regular brokerage account.

At the same time, you can automate your savings to gradually build your emergency fund. Pick an amount that works for your budget, then set up automatic monthly transfers. You can also use one-off cash windfalls to bolster your savings. That might include tax refunds, work bonuses and income you earn from a side hustle.

The Bottom Line

When it comes to saving money versus investing, know that they're equally important to your financial health. Both can help you shore up your finances and save for the future. Saving is a powerful way to grow your emergency fund and cover short-term financial surprises. Investing, on the other hand, is designed for long-term goals. Ideally, you'll strike a balance between the two.

If you're in the process of paying down debt, you might invest enough to recoup an employer 401(k) match while gradually building your emergency fund. In other words, you can fill multiple financial buckets at the same time.