Saving vs Investing

If you are like me, then you probably take a bit of the money you earn and put it into a savings account. (If you don’t do this, then it’s never too late to start!)

Saving is a great habit to get into; I know some people who put a dollar into savings every time they buy a cup of coffee. Those dollars add up quickly!

If you have a good saving habit, then you may be thinking about taking the leap into the world of investing. Investing is another great habit to get into, although sometimes it can be unclear when it is more beneficial to save or when it would be better to invest.

Let’s dive into the pros and cons of both.

Pros of Saving

The benefits of saving are plentiful. Once you get started it can be exciting to see your savings grow. When my savings account first hit $1,000 it felt like I was Mr. Monopoly.

Emergency Fund

And then when I had to pull from savings to pay for car repairs, I felt more like this guy:

Despite being an unforeseen expense, my car damage is a perfect example about the biggest benefit of saving: An emergency fund. If I had not saved a bit of my paychecks each month, then I would not have been able to cover this expense.

Even if you do not use your emergency fund, there is no price you can put on the peace of mind that comes with knowing you will be able to handle anything life throws your way.

Helping the Economy

You have probably at some point heard someone complain about how the US economy is on the verge of collapse. While this may be a slight exaggeration, it is true that Americans overall have developed poor money habits over the past few decades.

According the Bureau of Economic Analysis, the U.S. household saving rate, or the percentage of income that US citizens save, has steadily tracked downward over the past 30 years, to just 3.8 percent today.

Why is this a big deal?

Well if you have read our article on loans, then you know that banks can choose to lend people money. Where does this money come from? It comes from everyone’s savings accounts.

If people save more money, then banks have more funds to lend out to people. These loans are used by citizens to start businesses, buy homes, purchase vehicles, go to college, and more. These loans (theoretically) are investments meant to better society.

“Saving fuels investment, economic growth, and personal prosperity.” – rollcall.com

Cons of Saving

There is only one significant downside to saving vs investing, and that is the little to no returns received on any money in savings accounts. Every savings account has some sort of interest rate that it pays out based on how much money is in the account.

These interest rates quite low, in fact, they are lower than the rate of inflation, which is about 2%. This means that any money left in a savings account for a year actually loses its value by a small amount.

Pros of Investing

Investing can take many forms. So many, in fact, that we will soon be writing a separate article on all the different ways you can invest.

Generally, investing means putting your money somewhere other than a savings account with the intention of getting more money in return. Some examples of investing are the stock market, peer to peer lending, and real estate.

Long-term Growth

Investing usually results in greater returns, and is therefore better for meeting long term financial goals. These could include retirement, generating a passive income, or saving for future college education.

High Returns

Investments have the potential to earn much higher returns than savings accounts. Where most savings accounts will give a <1% return annually, investments can give returns anywahere from 6% to 20%.

Some successful investors can live entirely off of the returns of their investments, a situation a lot of us would consider ideal.

Cons of Investing

Illiquid

How liquid an asset is refers to how easy it is to turn it into cash. A savings account is very liquid because you can withdraw cash at any time.

Most investments have a low level of liquidity, as they are difficult to turn into cash. Some investments can even take up to a year to convert into cash.

This is one reason why investments are associated with more long term goals.

Higher Risk

Along with higher potential returns comes higher risk. Investments can suddenly decrease in value or entire markets can crash.

While there are ways to reduce the risk associated with investing, there is always going to be some level of risk which is much higher than a sacings account.

If you are interested in learning how risk can be reduced, check out our article on diversifing.

Going Forward

Saving and investing are great habits to get into, and the earlier you start the more benefits you will see in your future.

Our recommendation is to save up an emergency fund that can cover six months of your monthly expenses, and then start allocating more of your monthly income towards investments.

If you are looking to kick start your investing with a free stock on us, check out our review of Robinhood, a commission-free investing platform.

All of the points made in this article can be summarized in this handy infographic made by The Dollar School team:

Let us know what you think in the comments!