Saving vs. Investing – Understanding When and How to Do Both

Learning how to save and how to invest is one of the most important skills to helping manage your funds for the long term. In the grand scheme of things, saving and investing play two roles: one for having your goals, timeframe, and risk tolerance in place. That’s why, in this article, we dive into the crucial differences between saving and investing, when saving vs. investing is a good idea, and how you can craft a balanced financial plan that encompasses both.

The Basics: What Is Saving?

Setting aside money for short term purposes, emergencies is known as saving. Typically, parking your funds in a low risk, easy access account such as a savings account, CD or money market account. Therefore, it is the main goal of saving to have your money surrounded, liquid and accessible.

The key characteristics of saving include:

1. Liquidity: These funds are highly liquid, which means you can access your funds immediately whenever you’re in need of them.
2. Low Risk: Because all too often savings are in insured accounts, like FDIC deposit accounts, you have nearly no risk of losing your money.
3. Minimal Returns: Savings accounts are generally safe but they also provide much lower return than investments. Low interest rates in savings accounts will often not keep up with inflation.

When Should You Save?

Both, savings are required to have short-term control and for a number of emergency situations. Here are key scenarios when saving makes sense:

1. Emergency Fund: It is advised that people must save an amount of 3-6 months’ living expenditure to counter the unexpected times. This fund is for emergencies such as illness, loss of job, or other exigencies such as car breakages.
2. Short-Term Goals: If you are targeting to buy something in the next couple of years – be it a vacation, a car or a down payment for a house it is wise to put your money in a savings account.
3. Low-Risk Needs: If you afford to even lose any of the money you are setting aside then investing is a better prospect. Because it entails little or no risk it guarantees that funds will be available when required.
4. Peace of Mind: Some people care a lot about security, and just being sure that there is money in the bank means a lot to them. Savings accounts on the other hand provide cash which is secure, and safer than in a more risky investment.

The Basics: What Is Investing?

Savings, on the other hand means deliberately putting your money in a box (may it be in a physical saving box or an account in the bank) with the intention of utilizing it later at some point in time, hence investing it on stocks, bonds, mutual account, or real estate etc. Savings involve less risk than investing and has lower returns if compared to investing however, it involves high returns provided the period of investment is considered.

The key characteristics of investing include:

1. Potential for Growth: Stocks, for example, maybe more valuable in the long run than a setting in a savings account.
2. Risk: With the possibility of earning a larger profit comes more exposure to a greater amount of losses. They can reduce in value over time and in the case of short-term investments, they do not actually grow.
3. Time Commitment: Savings are generally relevant to long term objectives and in those cases there is ample time to reinvest and wait for the market to recover.

When Should You Invest?

For long term goals investing is the best option as it ensures that your main focus is to grow your money over a time period of years. Consider investing in the following situations:

1. Retirement Planning: Investing is long term, retirement is so this is a long term goal, making investing good. Compound interest and the possibility for growth over decades can be on your side if you invest in things like stocks, bonds or retirement accounts (like a 401(k) or IRA).
2. Long-Term Financial Goals: Saving can build generational wealth, if the amount of time before that thing will happen is more than 5 years, and if you’re investing, it will give your money the opportunity to grow; substantially.
3. Beating Inflation: With time, your money loses its purchasing power. You are investing in things which, in the past, have outperformed the rate of inflation, such as stocks or real estate.
4. Higher Returns: Saving is a lot less risky than investing, but it’s nowhere near as well paid. Investing is the way to go, even if you have to take some risk to get potential bigger return.

What is the balance between saving and investing?

Financial planning means saving and investing. Here’s how you can balance the two:

1. Build Your Emergency Fund First: Before you invest it’s also good to check you have enough savings to last at least 3 to 6 months without an income. Basically, you have a safety net to fall back on, in cases where emergencies and unexpected expenses happen.
2. Identify Your Goals: You should save for the short term if you desire to buy a car or go on a vacation. If you are looking to invest for long term goal such as retirement or growing wealth, that what makes most sense.
3. Consider Your Risk Tolerance: There is no tolerance for risk, much less on everyones scale of acceptable risk. Unless the thought of losing money is keeping you up at night, focus on saving and, although you’re trading instead of protecting your money, invest more conservatively. Investing can be rewarding for the long run, but only if you are okay with some ups and downs.
4. Diversify Your Portfolio: Diversification can mitigate risk not only with your investments, but even within your investments. Budget your money between growth and protection across stocks, bonds and real estate.
5. Stay Consistent: The foundation is the consistency. It doesn’t matter if you’re saving or investing. If you want to reach your financial goals, you have to work at it but this time, it’ll be in spending and investing.

Conclusion

Saving and investing have an important part in your financial success. Savings give you peace of mind and security in your spending; and investing will build your wealth overtime. Balancing the two strategies allows you to achieve financial stability in your present and long term growth in the future.

To do this, there’s one thing you need to understand: When you should be saving and when you should be investing based on your personal goals, risk tolerance and time horizon. And If you do, you’ll be well prepared to build and maintain your wealth over time.