Savings vs Investment – Explained! [UPDATED 2021]
Although everyone knows how different savings and investments are, most people forget the difference in their everyday lives. Since both these terms refer to an increase in your net worth, it’s easy to confuse the terms and use them interchangeably. However, investments and savings are fundamentally different and no amount of similarities warrant the use of both these terms interchangeably.
Knowing the difference between investments and savings can save you a lot of money. It can also help you understand and manage your capital better. Luckily for you, we here at H-Dot have put together a guide to illustrate how different investments and savings really are.
Here are the key differences between investments and savings, and why you need to use both strategically for a financially-healthy future.
Saving vs. investing explained
Saving refers to putting away money for expenses you might encounter in the future. Savings are liquid, meaning that they are ready to use in cash form and need no transformation before you can use them. Therefore, savings are excellent for dealing with expenses that have an urgent ring to them. However, savings is also ideal for long-term goals.
Savings are usually deposited in a savings account at a bank. It’s generally a good idea to go for the account with the highest annual percentage yield, or AYP. This gives you maximum profit percentage on top of your saved amount, only if you can meet the minimum balance requirement.
Investments are somewhat similar to savings in that you put away money to invest in a future expense. However, the difference lies in its form. Investments are not liquid, meaning that they aren’t usually in a cash form. For example, bonds, stocks, and mutual funds are all examples of investment.
If you’re looking to invest money, you should plan to keep your funds in the investment for at least five years. Investments can be very volatile over short periods of time, and you can lose money on them. So, it’s important that you only invest money that you won’t need immediately, especially within a year or two.
How are saving and investment similar?
Both use specialized accounts with a financial institution to accumulate money. For savers, that means opening an account at a bank. For investors, that means opening an account with an independent broker, though now many banks have a brokerage arm, too.
Savers and investors both also realize the importance of having money saved. Investors should have sufficient funds in a bank account to cover emergency expenses and other unexpected costs before they tie up a large chunk of change in long-term investments.
The pros and cons of saving
There are plenty of reasons you should save your hard-earned money. For one, it’s usually your safest bet, and it’s the best way to avoid losing any cash along the way. It’s also easy to do, and you can access the funds quickly when you need them.
All in all, saving comes with these benefits:
- Savings accounts tell you upfront how much interest you’ll earn on your balance.
- Bank products are generally very liquid, meaning you can get your money as soon as you need it.
- There are minimal fees.
- Saving is generally straightforward and easy to do. There usually isn’t any upfront cost or learning curve.
Despite its perks, saving does have some drawbacks, including:
- Returns are low, meaning you could earn more by investing (but there’s no guarantee you will.)
- Because returns are low, you may lose purchasing power over time, as inflation eats away at your money.
The pros and cons of investing
Saving is definitely safer than investing, though it will likely not result in the most wealth accumulated over the long run.
Here are just a few of the benefits that investing your cash comes with:
- Investing products such as stocks can have much higher returns than savings accounts.
- Investing products are generally very liquid. Stocks, bonds and ETFs can easily be converted into cash on almost any weekday.
- If you own a broadly diversified collection of stocks, then you’re likely to easily beat inflation over long periods of time and increase your purchasing power.
While there’s the potential for higher returns, investing has quite a few drawbacks, including:
- Returns are not guaranteed, and there’s a good chance you will lose money at least in the short term as the value of your assets fluctuates.
- Depending on when you sell and the health of the overall economy, you may not get back what you initially invested.
- You’ll want to let your money stay in an investment account for at least five years, so that you can hopefully ride out any short-term downdrafts. In general, you’ll want to hold your investments as long as possible — and that means not accessing them.
- Because investing can be complex, you’ll probably need some expert help doing it — unless you have the time and skillset to teach yourself how.