Investment and savings are two common ways for people to grow their money over time, but they have some key differences. Investing involves putting money into assets like stocks, bonds, real estate etc. with the goal of earning returns over time. Savings refers to setting aside money, often in bank accounts, that can be used for future needs. While savings provide security, investment provides the opportunity for growth. Understanding when to save versus invest, and the right balance between the two, is an important part of personal financial management.
Investing aims for growth while saving focuses on security
The core difference between investing and saving is the intent behind each one. The purpose of investing is to put money to work with the aim of earning investment returns over time. This involves taking on some risk in exchange for the potential for the money to grow faster than it would in a savings account. Saving money involves setting cash aside to be used for a future need or goal. Savings accounts and products offer low risk and high liquidity. While savings don’t earn significant returns, they provide security in case funds are needed.
Investing requires a long time horizon while savings can have a short timeframe
Investing works best when money can remain invested for longer time periods, generally for at least 5-10 years. Over long horizons, short-term market volatility can be smoothed out for the potential to earn higher returns through compounding. Savings are designed for short term needs where liquidity and principal preservation are priorities. Money that is needed to be spent within a few months or years is often best suited for a savings product versus investment.
Investing involves a wider range of products compared to basic savings accounts
There is a broad spectrum of investment asset classes ranging from stocks and bonds to real estate and alternatives. Investors can build a diversified portfolio across products, sectors, geographies etc. to balance risk and return potential. Savings products tend to be more limited – typical options include savings accounts, money market accounts and CDs from banks which provide FDIC insurance and liquidity.
Risk tolerance impacts the choice between saving and investing
A person’s ability and willingness to take risk is a factor in determining the right mix of saving versus investing. Conservative investors with low risk appetite may want to stick to mostly savings with smaller amounts in low-risk investments like bonds. Those with higher risk tolerance may choose to put most money in equities and other growth-oriented investments, and rely on savings just for short term funds.
In summary, investment and saving both have a role in an overall financial plan but serve different purposes. Investing provides potential for growth while saving offers liquidity and security. The right balance depends on factors like time horizon, risk preferences, and specific financial goals.