Are you saving or investing money? Though these terms are sometimes used interchangeably, they mean different things. We’ll explain the difference between saving vs investing and what financial goals you should have for both.
Saving vs Investing: What’s the Difference?
Saving money is putting money aside that you may use in the near future, either for a major purchase or in case of emergencies. This money should be easily accessible, especially your emergency fund. Saving money is also very low risk. You do not have to worry about losing the money sitting in a savings account.
However, investing comes with more risk. Investing is similar to saving in that you’re putting money away for future use, but the difference is that you expect it to grow over time. You get a higher return on the money you invest because there is more risk associated with it. When you invest, instead of putting money in a traditional savings account, you put your money in stocks, bonds, or mutual funds. If you are unsure of where to start, you may want to talk to a financial advisor. Investing can be complicated, and uninformed investing could result in you losing money.
When to Save & When to Invest
What goals should you save for? When does it make more sense to invest? In simple terms, for your short-term goals, you should save. For your long-term goals, you should invest. A short-term goal is 1 to 5 years, while a long-term goal is more than five years. A goal like saving for a new car would be considered a short-term goal.
On the other hand, preparing for retirement or putting money aside for your child’s college education would be considered long-term goals. The money you put away for these goals shouldn’t go in a traditional savings account. Instead, for a retirement account, you have a couple different options. If your employer offers a 401(k) or similar plan, you can put a percentage of your paycheck towards. Many employers offer a match on this too, so if you contribute 5%, your employer could also contribute 5%. It’s basically free money! Alternatively, if your employer doesn’t offer a 401(k), you can open up an IRA on your own. You can also put money into an IRA for your child’s college education, or you can open a 529 account.
How to Prioritize Saving vs Investing
Though both saving and investing are important building blocks for your financial future, in some situations, you may want to prioritize one over the other. If you don’t already have an emergency fund, creating one should be at the top of your financial priority list. An emergency fund can protect you financially if you have unexpected medical bills or car repairs, or if you lose your job and it takes a while to find a new one.
You should also prioritize putting money into your retirement accounts regularly, even if it’s only a little bit every paycheck. It may seem like retirement is a long ways away, especially if you’re just starting out in your career, but that’s exactly why you should start now! Take advantage of the compound interest of your investments and you’ll see that money grow over the next few decades.
If you struggle to save or invest because you have too much debt, a nonprofit credit counseling agency like ACCC can help.
If you struggle with debt, ACCC can help. Sign up for a free credit counseling session today!