Saving vs. investing: Find the right approach to managing your money

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For many, the best way to achieve financial goals is to both save and invest. What you may not realize, though, is that saving and investing—terms that are often used interchangeably—can be two very different things. Here’s what you need to know as you develop your financial plan.market vs. savings accounts, and wonder which is right for you, consider these key points.

The difference between saving vs. investing money:

While both options can generate a return, the majority of people do both, as the purpose of investing vs. the purpose of saving can be different.   

Saving involves putting money in a savings account where it can grow essentially risk-free at a modest rate. With a savings account, your dollars can grow without being subjected to the ups and downs of the market, and when your financial institution is FDIC-insured, your balance is protected and insured, too (up to $250,000 per depositor for each account ownership category).
People choose savings accounts for several reasons, from savings for a short-term need, like an upcoming car payment, or as part of an emergency fund to cover unforeseen expenses. Some also choose to use their savings account as a nest egg for their future.  

Investing requires you to put money into tradable assets, such as stocks and bonds, where it can grow (ideally) for years. Know that it can take time to withdraw funds from an investment, as they’ll need to sell your assets and convert them into cash. 



When you set up a long-term investment portfolio, you put your cash in a variety of assets, such as mutual funds, stocks and bonds, which are estimated to grow over time. Most people invest for retirement, but some also invest for their children’s education or a new home. While these types of investments come with the appeal of larger potential gains, they also come with a risk of losing money, too.  

As you’re deciding between high-yield savings vs investing, you should think about your financial goals and objectives. Here are some factors to consider when it comes to choosing a savings account vs. investing.


Savings
Investing
Time period
Weeks to years
Years to decades
Guaranteed return
Yes, often between 0.01% and 2%*
No
Risk
Almost none, especially on FDIC-insured accounts
Can be high or low risk, depending on the assets
Access to cash
Easy Access
Yes, but not immediate
Fees
Generally, low or no fees
Can be trading fees/managing fees
*based on market conditions as of December 2019

Pros and cons of saving

Return
●    Pro: Banks usually offer fixed rates with a guaranteed rate of return Many big banks pay an average of 0.01% Annual Percentage Yield (APY), while others like PurePoint® Financial offer higher, more competitive rates.
●    Con: Your APY may change with the market.

Risk
●    Pro: Minimal risk. And if your bank is a member of the FDIC, your balance is protected up to $250,000 per depositor for each account ownership category .
●    Con: If you’re not earning a competitive rate (matches or exceeds the inflation), you will essentially ‘lose’ money.

Savings options
●    Pro: Variety of types: High-Yield Savings Accounts, CDs, Money Markets, etc.
●    Con: Because they’re low-risk, rates are generally more modest as compared to the earning potential of investment products.

Time frame
●    Pro: As long as you choose, from weeks to decades.
●    Con: Your APY is not based on longevity of your account, it will always be subject to market conditions.

Pros and cons of investing

Return
●    Pro: Potential to earn a higher return on your investments vs. savings 
●    Con: If markets drop, you could lose a significant sum of money

Risk
●    Pro: Investors can usually outpace inflation (which typically hovers around 2%)
●    Con: Markets can be volatile

Investment options
●    Pro: Many securities available: mutual funds, exchange-traded funds, stocks, bonds, real estate, futures, options, etc.
●    Con: The options can be overwhelming, where you should consult with a financial and/or tax advisor 

Time frame:
●    Pro: Over time, markets tend to rise, which makes investing a smart long-term tactic.
●    Con: If you need your money sooner, you could be forced to withdraw after a drop

How much money should you have in savings vs. investments?

Wondering how much to keep in savings vs. investments? The answer is different for everyone.

It’s always good to have dollars readily available in case of emergency. For example, to protect yourself in case of job loss, aim to save six months of your salary in a savings account that you can withdraw. For a basic car repair, keep aside $500 to $1000 handy. Factor in the issues you can predict, and add in possible hazards to determine your overall short-term savings goal.

For longer-term investments, experts suggest investing between 10% and 20% of every paycheck, but that will vary based on your budget and expenses. One way to determine how much you should save vs. invest is to think about the lifestyle you want in retirement. If you can estimate your future expenses, you’ll have a better gauge of how much you can invest, and at what rate those investments will need to grow.

What should you do: Save or invest?

In most cases, you’ll want to use both as part of your overall savings strategy. Each can serve different purposes, so determining how much to save vs. invest will come down to your financial situation. Fortunately, PurePoint® Financial savings solutions come with competitive interest rates, so if you decide to save first, your money will still earn a competitive rate. You can then take that money and invest it when ready.

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