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Banking 101: Saving vs. Investing - Which Option is Better for Your Money?

Written by Jolene Latimer | Published on 11/21/2019

Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.

Are you trying to weigh the benefits of saving vs. investing? The quick answer is that both could be necessary for a healthy financial life.

Even though it might seem complicated, you can save and invest at the same time to accomplish different financial goals. Your savings should be used to cover emergency expenses and intermediate goals, such as buying a house. Investing can help you plan for retirement.

Here’s how to know the difference between saving vs. investing and decide which one is best for your situation.

In this article we will cover:

A quick look at saving vs. investing

Saving vs. investing
Saving Investing
Typical products
  • Savings accounts
  • Certificates of deposit
  • Money market accounts
  • Stocks
  • Bonds
  • Mutual funds
Risk Low — FDIC insurance covers up to $250,000 per institution, per account Low to high
Short term or long term Short term to mid-length Long term
Liquidity High High
Interest Low Potentially high (or low)

When you should save

You need an emergency fund

From car repairs and home emergencies to medical expenses or job loss, there are always situations that take us by surprise.

Having an emergency fund saved up hopefully means you won’t have to go into debt when the unexpected occurs. If you don’t already have an emergency fund, this should be your first financial goal.

Remember, if you use your emergency funds for any reason, you should start saving toward rebuilding it as soon as your situation is resolved.

You expect to spend the money in the near term

If you’re saving money for a large purchase, such as a house, it could make sense to keep down payment funds in savings instead of investing them.

For investments, you typically want to think long term so that you can compensate for fluctuations in the market. So, if you’re not going to spend the money within the next five years, you could shift your mindset to figuring out where you’ll get the highest return instead of balancing that with needing liquidity.

How much you should save

There isn’t a one-size-fits-all approach to saving, but there are some general guidelines you can follow to make sure your savings are substantial enough for your lifestyle.

When it comes to deciding how much to save, financial experts recommend an emergency fund that can cover three to six months of your living expenses. How much does that equal in dollar amounts? That usually depends on your stage of life.

Let’s say you’re between ages 35 and 44. People in this age range typically spend $71,198 each year, or about $5,930 a month. If you’re spending $5,930 a month, you’d need to save:

  • $17,790 to cover three months of expenses
  • $23,720 for four months
  • $29,650 for five months
  • $35,580 for six months

However, you don’t have to direct all your income to building this fund immediately.

You could follow the 50/30/20 rule. This strategy suggests you spend 50% of your income on fixed expenses and 30% on discretionary expenses and save 20%.

Let’s say you earn $5,000 a month. Following the 50/30/20 rule, you’d:

  • Spend $2,500 on fixed expenses
  • Spend $1,500 on discretionary expenses
  • Put $1,000 toward your savings

Where you should keep your savings

When it comes to your savings, you don’t have to settle for keeping your money in just any old bank account. In fact, it helps to be more strategic with your funds.

By putting your savings in a high-yield savings account or depositing it into a certificate of deposit (CD), you could earn some extra money in interest. You’ll want to choose an account that offers low fees.

But how do you choose between a CD or a savings account?

Certifcate of deposit (CD)

This is a timed deposit insured by the federal government, typically with a fixed interest rate. Term lengths generally range from a few months to five years. CDs generally have a higher rate of return than savings accounts (the average APY for a one-year CD is 1.267% versus an average 0.278% APY for a savings account). However, you could pay a penalty if you access your funds before the maturity date.

If you’re saving money for a major purchase and you know you won’t access the funds until the maturity date, this could be a good option for you. Compare CD rates online before committing to anything.

High-yield savings account

One of the pros of a high-yield savings account is that you can use the money almost freely. Federal law mandates certain types of telephone and electronic withdrawals, including transfers from savings accounts up to six per statement cycle. You’ll earn a higher interest rate on the money than if you simply left it in a checking account (the average APY is 0.196%) or a basic savings account, but not as much as you would with other investment options such as a CD or purchasing shares in a company that’s experiencing growth.

This is a strong option for money for which you need easy access, such as an emergency fund. It’s best to shop around and compare savings accounts before making a final decision if you go this route.

If you’re looking for a different option, you could go with a money market account, which is similar to a savings account in many ways, except that some money market accounts allow you to write checks. Similar to savings accounts, you are limited to certain types of telephone and electronic withdrawals, including transfers from savings accounts up to six per statement cycle, per the federally mandated Regulation D. If you go over this limit, you could be charged a fee. Or, the bank might close your account and convert it to a checking account.

You can compare money market accounts to find the best one for you.

When you should invest

Investing your money is a whole different ball game than saving; although, as we’ve noted, you don’t have to make a choice between investing or saving. You can do both at the same time.

Many invest when they’re thinking about retirement planning, which is something you should do at the start of your career.

Here are other financial events that could trigger you to start investing:

  • You aren’t saving toward any short-term goals: If your emergency fund is topped off and you don’t have any planned large purchases, it might be a good time to switch gears and start investing.
  • You’re out of debt: You can still invest even if you’re paying off high-interest debt. But when you get out of debt, you should start directing those monthly debt payments toward some investments.
  • You’re saving for your child’s future: If you’re planning to help your children with college or the purchase of their first home, investing those funds long term could help grow your wealth before your children reach those milestones.

How much you should save for retirement

When it comes to saving for retirement, everyone’s different. And guidelines on how much you should save will vary.

For example, Fidelity suggests you save at least one times your salary by age 30, all the way up to 10 times your salary by age 67. For many, though, it will never be that simple because life is unpredictable.

Others will suggest you have 25 times your annual expenses when you retire, which can be just as hard to calculate. How much you should save really depends on what kind of lifestyle you want in retirement.

Do you intend to keep working past the traditional retirement age? Do you want to travel? Are you planning to live with family? The answer to these questions will help you understand how much money you need to put away to have a comfortable retirement.

If you’re not quite sure about the answers to these questions, that’s fine. It’s best to save for retirement throughout your career, even if you aren’t sure how much you’ll need.

Where you should invest your money

Ask five people how to invest and you’ll get five different answers. Investing is very personal. Much of investing depends on your personal risk tolerance.

If you can handle the thought of possibly losing some of your money due to market fluctuations or investments that don’t work out, you might get more aggressive with your choices.That could mean choosing stocks that have the potential for high rewards — but also possibly big losses.

On the other hand, if you like to play it safe, you might want to consider investing in the bond market, which has lower returns but is often seen as a source of stability.

One way to get some guidance on what method is right for you is to find a financial advisor who can help you weigh your options. Some people are turning to robo-advisors to fill this need. A robo-advisor is an automated investment advisor that helps novice investors gain access to the market at lower fees than a traditional financial advisor.

Also, make sure to maximize your retirement-specific contributions throughout your career. For example, if your employer offers a 401(k) match, contribute the maximum each year — if you can.

The final word

To create a healthy financial life, it could be necessary to save and invest at the same time.

Both saving and investing help you accomplish different financial goals. If you’re new to financial planning, it could seem overwhelming to balance your short-term savings goals with your long-term investment goals. But as you take a hard look at your finances and what you hope to accomplish with your money, you’ll start to gain more clarity on what choices are best for you.

All rates current as of 11/21/2019

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