Should I Save or Should I Invest?

A forward-looking financial plan that allows you to prepare for retirement or for a rainy day involves an important decision: What to do with the money you’re putting away for later. There are two main options: Save the money or invest it.

Many people have only a hazy understanding of the difference between these two avenues for preserving—and potentially growing—their money. It’s common to have difficulty choosing which strategy to use.

Let’s look at the distinctions between saving and investing, including the accounts used for each, and break down how to choose which approach is best for your situation.

Saving vs. Investing: What’s the Difference?

Saving and investing both refer to storing and growing your money, but these terms have some crucial differences. While saving means keeping your money secure for future use, investing means buying assets that you hope will increase in value to make your money grow over the long-term. Saving offers a guaranteed—but usually low—return, while investing involves risk: You might lose money, but you also might grow your money a lot.

What is Saving?

Saving money in a financial institution involves putting your earnings in specific, insured accounts that allow for easy access to these funds when you need them.

The places to save money are typically “deposit accounts,” which allow you to deposit and withdraw funds. Deposit accounts are insured for up to $250,000 by the FDIC or NCUA, which makes them particularly safe places to store money.

A checking account is designed to hold your money for daily use and is not considered a savings vehicle. Savings options with financial institutions come in three types:

• Savings accounts: A savings account holds your money safety and adds to it over time as it earns interest. Interest rates on savings accounts are typically lower than those on other savings vehicles and investment returns. The rates may be so low they don’t outpace inflation, which means that this is not the best place to park your money if you’d like to see it grow. But it is a safe and relatively accessible place to keep savings you may need to access quickly.
• Certificates of deposit: A certificate of deposit (CD) is a type of account that provides you a higher interest rate than a savings account in exchange for your agreement to keep your money in the account for a set number of months. You will have to pay a penalty if you withdraw your funds before the agreed time—the maturity period—so this option is only useful for those who are sure they won’t need some of their money for a while.
• Money market accounts: A money market account is a type of deposit account that typically offers slightly higher interest rates than traditional savings accounts but comes with restrictions, like a limit on the number of transactions you can do in the certain period. You may have to deposit a certain amount to start the account and to pay a monthly maintenance fee unless you maintain a minimum amount in the account.

What is Investing?

Investing means buying assets such as stocks and bonds on the assumption that their value will increase and your investments will grow. Investments by their nature have the potential for a higher rate of return than fixed-rate savings vehicles, but they also involve a much higher level of risk. However, it's important to note that even those with a conservative risk tolerance should not dismiss investing.

Investments do not allow you to deposit and withdrawal funds in the way that deposit accounts do. To get your money out of investment vehicles, you must sell the assets involved. This can result in a loss if the asset’s value is low at that time, it can come with fees or tax consequences, and it can take longer than withdrawing funds from a savings account. For this reason, you should not put money you need to access on a regular basis in investment accounts. Investing is meant to be done with a long-term time horizon in mind.

Another difference between investment vehicles and deposit accounts is that investments are not insured by the FDIC, so you are not guaranteed to recoup their value if your investment assets face a loss.

There are a number of types of investment vehicles:

• Mutual funds: A mutual fund is a collection of investments like stocks, bonds, money market funds and other accounts. The diversity of the assets in these funds means that their investors each own a small portion of a variety of assets, which reduces their risk. These funds may hold different risk profiles depending on what assets types are included. Mutual funds can be passive funds, which hold a wide cross-section of stocks and/or bonds that are not actively traded, or actively managed funds, in which professionals buy and sell assets to try to grow the returns.
• Stocks: A stock is a share of a company, so investing in a single type of stock means buying a small portion of a single company. Some investors hand-pick the stocks they want to buy and create their own basket of investments based on their personal judgement or proclivities, as opposed to buying a mutual fund that chooses stocks on their behalf. Investing in individual stocks involves increased risk as it concentrates your investments in fewer places, but this strategy also holds the potential for very high returns.
• Bonds: A bond is a fixed-rate “IOU” issued by government and municipal entities and backed by their full faith and credit. Because they come from government organizations, bonds tend to have a far lower risk profile than stocks. They are often used to complement stocks in mutual funds to lower the overall risk. As a more conservative investment, bonds are favored by those who are more risk-averse or who will need to gain access to their investments relatively soon, such as those preparing to retire.
• Exchange-traded funds: An exchange-traded fund (ETF) is a type of investment fund that investors can trade throughout the day like stocks but that provide them exposure to a variety of asset classes, like mutual funds.
• Retirement accounts: Retirement accounts, such as 401(k)s, IRAs, Roth IRAs and others, are not investments in themselves, but tax-advantaged accounts that serve as containers for money you can then invest in assets like stocks, bonds, mutual funds, ETFs and other options. Many institutions now offer target-date mutual funds that they regularly rebalance to make your investments more conservative as you get closer to the year you plan to retire.

Is It Better to Have Savings or Invest?

Deciding whether it is better to have savings or invest your funds starts with defining your financial goals. Are your intentions for your savings plan related to having more money available to use on a regular basis or access quickly when an urgent need arises? Or do you have those basics handled and are now looking for a way to grow your extra money as much as possible over time while controlling your risk?

Let’s look at when it might be best to save and when it might be best to invest.

When to Save

You should prioritize putting your money in savings vehicles like savings and money market accounts when you will soon need access to your cash, such as when you are saving for a security deposit on an apartment or putting money away to purchase an appliance or a vehicle.

It is also a good idea to build up your emergency savings in an accessible account such as a savings account. This way, you will have ready access to this money whenever needed, such as after a job loss, an emergency medical intervention or unexpected car repairs.

When to Invest

If you have sufficient cash reserves in an accessible place, you should invest the rest of your extra funds to increase your potential for higher returns. The funds you invest will be earmarked for long-term financial goals like retirement, college or a down payment for a home. You will eventually be able to access these funds when you need them, but it will take longer for you to get your money out and deposited into an account you can use to transact.

While employees may have access to an employer’s 401(k) or 403(b) plan to invest in, self-employed individuals or others without access to an employer plan can open an individual retirement account (IRA). Most types of IRAs allow you to invest pre-tax dollars so your money can grow tax-deferred, while Roth IRAs require you to invest after-tax money.

One excellent reason to invest is to capture your employer’s 401(k) match, if they provide one. They may match the amount of money you put in your retirement account up to a certain percentage of your salary. If it is possible to invest that matchable amount of your paycheck each month, you’ll be doubling your retirement investment by taking full advantage of this benefit from your employer.

Get Started With a Savings Account Now

A great first step in getting started with saving and investing is to open a savings account.

At Seacoast we offer several different kinds of savings accounts, including an account for youth to help them learn about financial responsibility. We also offer 3-, 7-, and 11-month CDs and money market accounts.

Use our comparison tool to figure out which type of savings vehicle is the best fit for you.