Saving vs. Investing: What is the Key Difference Between Saving and Investing? – Basic Finance Literacy

Two main concepts come up when discussing money management, investing and saving. Although they are sometimes confused, they are very different. But, the question is “What is the key difference between saving and investing?” You are reading in the right place. 

We will break down what saving and investing means. We help you understand when it is better to save your money and when to invest it. Saving is about keeping money safe for short-term needs, while investing is about growing your money for the future. Both are important, depending on your goals.

The Basics: What Are Saving and Investing?

Saving: It means putting aside some of the money you earn for later use. Instead of spending it right away, you can keep it safe for things you might need in the future. Usually, people save money in bank accounts because they are easily accessible when needed. The main goal of saving is to protect your money, not necessarily to make it grow a lot. 

Investing: It is different from saving. When you invest, you use your money to buy things like stocks, bonds, or property, hoping that their value will increase over time. While investing has the potential to make you more money than saving, it comes with higher risks. We can say that there is a change in the value of your investments and also, a chance for bigger rewards if the investments do well. 

In short, saving is safer but provides smaller returns, while investing is riskier but can lead to larger rewards. It is important to understand both and choose what is right for your financial goals. Let’s break these ideas down further.

Why Do You Save or Invest?

The purpose of saving or investing behind saving and investing is one of the major differences. Because people save and invest for different reasons, let’s discuss the following:

Saving is generally for:

• Short-term goals: Buying a new phone, planning a vacation, or saving for holiday shopping.

• Emergency funds: Saving a portion of your income for unexpected situations, like medical emergencies.

• Safety Net: Ensuring you have enough funds in case of temporary job loss or a sudden drop in income.

You can access your money when you need it, without losing any of it. The main goal of saving is security. 

In contrast, investment is usually used to:

• Long-term goals: Planning for retirement, buying a home, or paying for your child’s school.

• Wealth growth: It is the process of making your money grow over time and make it work for you.

The main goal of investment is growth. The goal is to grow your wealth over time, but this takes time and is more uncertain than saving. 

How Do You Ensure Your Money is Safe?

One of the main differences between investing and saving is the amount of risk. It is very important to think about how do you ensure your money is safe. 

Saving: money is generally very safe in a savings account. The government insures most bank savings accounts, so even if the bank faces financial difficulties, your money is safe. However, savings generally earn relatively low interest. Sometimes even less than the rate of inflation, which means your money’s purchasing power can decrease over time. 

On the other hand,

Investing: It comes with varying levels of risk. When you invest, you are putting your money into markets or assets that can rise or fall in value. There is always a chance that your investments may lose value, especially in the short term. But, over the long term, investments generally have the potential to grow significantly, outpacing inflation and increasing your wealth. 

When Will You Need the Money?

The time frame for when you will need the money is a key factor in deciding whether to save or invest. 

Saving is the best suited for:

• Short-term needs: If you will need the money in a few months or even a couple of years, saving is the better option. Because you can’t afford to take risks with money that you will need soon. 

For example, if you are saving for a down payment on a car you plan to buy next year, you don’t want to risk losing that money in a volatile stock market. A safe savings account will keep your money secure and easily accessible. 

Investing is best for:

• Long-term goals: If you are saving for a goal that may take five, ten, or 20 years to achieve, it can make more sense to invest. Since the market eventually recovers from short-term volatility, the longer time you generally have, the more risk you can take.

For example, investing in stocks or mutual funds can help you significantly grow your wealth by the time you retire, even if it is thirty years away. 

How Much Can Your Money Grow?

• Saving: Although savings accounts pay interest, the rates are generally quite modest, typically less than 1% annually. Your money doesn’t grow much, even if it is safe. In fact, if inflation exceeds the interest rate on your savings, the real value of your money decreases. 

• Investments: However, there is no certainty when it comes to investments, which have the potential for much higher profits. Investments such as equities have generally outperformed inflation over the long run, with average annual returns of 7% or more. But, these returns fluctuate from year to year, and you may face short-term financial losses. 

How Easily Can You Access Your Money?

• Liquidity: It refers to how quickly and easily you can access your money when you need it. 

• Savings: You can withdraw money from a savings account at any time without any penalties. With savings, liquidity is high. Saving is often used for emergency funds. You can get the money quickly when you need it. 

• Investing: It can reduce liquidity. Some investments, such as stocks, can be sold quickly for a profit, while other investments, such as real estate or specific bonds, may take longer to turn a profit. Additionally, Investing depends on the type of investment account, early withdrawal penalties may apply. 

Saving vs. Investing: When to Save and When to Invest?

Knowing when to save and when to invest depends on your financial goals, timeline, and risk tolerance.

Save When;

• You need the money in the future such as within the next 1-3 years.
• You want to build an emergency fund.
• You prefer safety over growth.

Savings are best for short-term goals or when you need guaranteed access to your funds. 

Invest When:

• You have long-term goals like 5 years or more.
• Your money should increase in value over time. 
• You are willing to take some risk for the potential of higher returns.

Investing is better suited for long-term goals where you can afford to ride out the ups and downs of the market. 

Read More: What is the financial literacy on investment behaviour?

Conclusion

So, you have understood what is the key difference between saving and investing. Ultimately, a balanced financial plan involves both saving and investing.  It is important to save for short-term needs and invest for long-term growth. Consider investing to insure your future and saving to protect your present. 

FAQs: What is the Key Difference Between Saving and Investing?

What is the main purpose of saving?

The main purpose of saving is to put money away for short-term goals. Savings typically place in low-risk accounts, like savings accounts. It helps to ensure easy access and safety of funds. To manage daily expenses, unplanned costs, and financial security in the short-term 

Is saving safer than investing?

Yes, saving is generally considered safer than investing. Savings are usually kept in low-risk, interest-bearing accounts, which provide security and easy access. On the other hand, investing involves risks such as market fluctuations but offers the possibility of higher returns over the long term. 

What are the benefits of saving before investing?

The benefits of saving before investing include creating an emergency fund for unexpected expenses and ensuring that you have accessible cash for short-term needs. It provides a financial cushion so that when you invest, you can take on more risk without worrying about financial obligations. 

When should I start investing instead of saving?

You should start investing once you have built a solid emergency fund in savings, typically enough to cover 3-6 months of living expenses. After that, investing can help grow your wealth over the long term, especially if your financial goals are years away, like retirement or buying a home.