Saving versus investing: What’s the difference?
Though “saving” and “investing” are often used interchangeably, they are quite different activities that should be utilized in achieving different goals.
When someone says “I’d like to save more money,” what do they really mean? If the purpose is to save for a new refrigerator or a down payment on a house, which saving method or type of financial product would that person use? What if a person’s goal is to build wealth for retirement? Will saving get them there?
Though “saving” and “investing” are often used interchangeably, they are quite different activities that produce unique outcomes. Saving is defined by Investopedia, according to Keynesian economics, as the amount left over when the cost of a person’s consumer expenditure is subtracted from the amount of disposable income that he or she earns in a given period of time. Investing can be defined as the process of purchasing assets such as stocks, bonds, real estate, and mutual funds with the expectation of future income and/or capital gains (growth in value). Investing can also include the amount of time you put into the study of a prospective company, especially since time is money.
Saving provides funds for emergencies and for making specific purchases in the relatively near future (usually three years or less). Safety of the principal and liquidity of the funds (ease of converting it to cash) are important aspects of saving. People usually put savings into the safest places or products that allow them access to their money at any time. Examples include savings accounts, checking accounts, and certificates of deposit. At some credit unions and banks deposits may be insured by the National Credit Union Administration (NCUA) or the Federal Deposit Insurance Corporation (FDIC). But there’s a tradeoff for the security and availability of these savings methods: your money is paid a low wage (or interest rate) as it works for you.
Investing, on the other hand, focuses on increasing net worth and achieving long-term financial goals. When you invest, you have a greater chance of losing your money than when you save. Unlike FDIC-insured deposits, the money you invest in securities, mutual funds, and other similar investments is not federally insured. You could lose your principal, which is the amount you’ve invested. That’s true even if you purchase your investments through a bank. But when you invest, you also have the opportunity to earn more money (higher interest rates) than when you save. There is a tradeoff between the higher risk of investing and the potential for greater rewards.