Should You be Saving or Investing Right Now? Here’s How to Tell

Many people use the terms saving and investing interchangeably because they go hand in hand to ensure financial stability. But saving and investing have many differences that you should know when planning for your financial future. In general, saving provides a safety net for unexpected expenses and short-term spending goals, while investing is a strategy to help build long-term wealth. Being aware of these differences can help you prepare the best financial foundation for yourself and your family.

WRITTEN BY: MICHAEL FLANNELLY

Image Credit: AaronAmat / iStock.

What’s the Difference Between Saving and Investing?

The main difference between saving and investing is the amount of risk you are willing to take to reach financial goals.

When saving, you generally want a low-risk option to build and maintain wealth. Saving is when you gradually set aside funds — maybe a portion of your paycheck — in a safe place, like a savings account or money market account. These accounts allow you to store cash that can be easily accessible and have little risk of loss of value. Saving is often intended to reach shorter-term financial goals, like creating a fund for emergencies or saving a house down payment.

Investing is when you put money at risk to make more money. When investing, you may trade stocks, mutual funds, or other assets because there’s a potential for a return on the investment, but you are also at risk of losing the value of the investment. The goal of investing is to grow your wealth over time by taking advantage of capital appreciation and compound interest. This strategy is typically used to reach long-term goals, like building wealth for retirement or saving for a child’s college fund.

When You Should Choose to Save?

Saving and investing is not an either/or proposition. Generally, saving and investing go hand in hand to ensure financial stability. However, certain scenarios make one strategy better than the other.

Image Credit: DepositPhotos.com.

1. You don’t have an adequate emergency fund

Building up emergency savings is one of the first things to do before you start investing. An emergency fund would ideally help you following an unexpected financial event, like paying a hefty medical bill or covering expenses if you were to lose your job. It is recommended that you save the equivalent of three to six months of expenses and debt payments in an emergency savings fund.

Image Credit: Ivan-balvan / istockphoto .

2. You need money in the short term

If you need money for short-term goals, like a down payment on a house or an upcoming vacation, you should choose to save. A high yield savings account or a money market account may be the best option to save for these short-term goals.

Image Credit: monkeybusinessimages/istockphoto.

3. You want to access cash as quickly as possible

Savings accounts are highly liquid, meaning that you can access the money in your account as soon as possible. You can go to your bank, withdraw funds from a savings account, and have the cash right away.

Image Credit: DepositPhotos.com.

When You Should Choose to Invest?

Here are some tips for deciding when you should decide to invest.

Image Credit: nortonrsx.

1. You’ve paid off high-interest debt

Paying off high-interest debt, such as a credit card balance, will likely provide you with a sound financial foundation. You’re paying off an interest rate that’s likely higher than potential investment returns. Once you pay off high-interest debt, you can look to invest money in stocks, bonds, and other assets.

Image Credit: travellinglight / istockphoto.

2. You want to build long-term wealth

There is potential for greater rewards when you invest because of a capital appreciation and compound interest. But when you invest, there is no guaranteed return on your investment, and you can lose part or all of the funds. This risk-reward calculation is best for long-term goals, because you can withstand the volatility of the financial markets. This strategy is best for building a retirement nest egg or savings for a child’s college tuition.

3. You’re taking advantage of a 401k or IRA

Contributing to an employer-sponsored 401(k) or an Individual Retirement Account (IRA) should be your first step in building wealth for retirement. These retirement accounts provide tax-advantaged ways to invest your money. Once you’ve maxed out contributions to these accounts, it may be good to explore additional investment products.

Image Credit: DepositPhotos.com.

Savings Account Features to Look For

• FDIC Insurance: You want to make sure the Federal Deposit Insurance Corporation (FDIC) insures your savings accounts. The FDIC guarantees up to $250,000 in nearly all savings account products if your bank fails.
• Interest Rate/APY: Many traditional banks pay little interest on savings account deposits, so you may want to shop around to see where you can get the best rate. Certain institutions offer higher interest rates than large, brick-and-mortar banks.
• Fees: You want to look for savings accounts with little or no fees. Many banks may waive fees if you have a large enough balance or enroll in direct deposit, while other institutions won’t charge a fee no matter what.

Image Credit: Prostock-Studio / istockphoto.

Brokerage Account Features to Look For

• Diverse investment options: You want to ensure your brokerage firm offers a wide range of investment products, including stocks, bonds, options, ETFs, and mutual funds. Additionally, brokerage firms that provide individual retirement accounts (IRA) may be ideal if you’re looking to save for retirement.
• Commissions/Fees: High commissions and fees can eat away at your investments, so you want to look for brokerage firms with low investment fees.
• Account Minimums: Many brokers require that a customer deposit a minimum amount to open an account. Depending on your financial situation, you may want to look for a brokerage account with an account minimum that you can afford without straining your finances.

Image Credit: EmirMemedovsk.

The Takeaway

Another thing to consider when deciding between saving and investing is how inflation affects your money with each strategy. With investing, there is a potential for your investments to keep up with inflation, which may be ideal in a high inflation environment. In contrast, inflation may eat away at your savings because the money you put into your account today will be worth less a year from now.

Nonetheless, no one strategy works for everyone because financial situations differ, as do financial goals and comfort with risk levels. The real question isn’t whether you should save or invest; it’s more about how to include a combination of both to meet your financial goals.

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA  / SIPC  . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
SoFi Checking and Savings is offered through SoFi Bank, N.A. 2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.

Image Credit: nicoletaionescu / istockphoto.