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Saving vs. Investing: How to Decide?

Catherine Hiles • November 10, 2023

Choosing between saving vs. investing can seem daunting. How do you know when to start investing and when you should focus on saving? Ideally, you’ll do a little of both, but that isn’t always possible.

Saving money in an account provides easy access to funds when needed, but investing can help grow your money over time. Both are useful options for your money, but finding the right balance can take time and effort.

A high-yield savings account is an excellent place to stash money in case of an emergency (like an unexpected car repair) or when saving for a short-term goal (like a vacation). An investment account is ideal for building long-term wealth, like saving for retirement.

Learn how to decide whether to put your money in a savings account or invest it for your future.

Choosing between saving and investing

Knowing that saving and investing can help you grow your money, how do you choose the right option?

The first step is to make sure you know your goals and understand your current progress toward those goals. If you’re saving money for a down payment on a house or a car, your money should be easily accessible. If your goal is to fund your retirement, accessibility isn’t as much of a concern.

Saving money might be the best choice if:

  • You don’t have an emergency savings fund. If you lose your income, you’ll need money to fall back on. Ideally, you’ll have at least three-to-six month’s worth of expenses saved before you start investing,1 depending on your employment and family status.
  • You will need to access the money within the next few years. A savings account is ideal if you are saving for a specific expense within the next few years. For example, if you’re saving to buy a house or for a once-in-a-lifetime vacation, you’ll need easy access to the money when you’re ready to make your purchase.
  • You are risk-averse. Investing can be risky. Savings accounts are usually FDIC-insured (by the Federal Deposit Insurance Corporation) for up to $250,000 per depositor.2 If the bank goes under, you won’t lose your money if it’s FDIC-insured.

Investing money could make sense as a priority if:

  • You have sufficient emergency savings. Once you have enough savings to sustain you through an unexpected loss of income, you can invest to grow your money for the future.
  • You don’t have high-interest debt. Although investing can yield a high return, it doesn’t make sense to invest a lot of money if you have high-interest debt like credit card debt. Instead, plan to pay off your debt before you start investing.
  • You want to save for the long term. Investing is ideal for long-term goals, like funding retirement. You may have the option to save through an employer-sponsored account such as a 401(k), though there are other options like an individual retirement account (IRA) or a brokerage account.

In many cases, it makes sense to save and invest simultaneously, even if you’re still working on building your emergency fund.

For example, if your work offers a 401(k), try to invest the entire amount your employer will match. Otherwise, you’re leaving free money on the table.

Selecting the right savings account

With so many options clamoring for your attention, it can be tricky to know which one will best fit your needs. Ask yourself the following questions to help you make your decision.

  • Is there a monthly fee? Although some banks may charge a monthly account fee, plenty don’t. Look for a fee-free financial institution or one that waives fees if you carry a minimum balance in the account.
  • Are there any balance requirements? Some banks may require you to have a certain amount of money to open an account and keep a minimum balance to qualify for a higher interest rate.
  • Does the bank have FDIC insurance? When you put your money in a savings account, you trust the bank to take care of it. Ensure the bank carries insurance from the FDIC for extra protection. The FDIC insures deposits of up to $250,000 per depositor, which gives you extra peace of mind that your money is protected.
  • What is the annual percentage yield (APY)? To yield the full benefits of a savings account, you need an account with a high APY.
  • How accessible are the funds? The ideal savings account should make it easy to access your funds when needed.

Consider the type of savings account you want to open as well. Does a traditional savings account make sense, or do you want to save money using a certificate of deposit (CD) or a money market account (MMA)?

Learn more about the different types of bank accounts to determine the best choice for you.

Ready to put your savings to work? Open a Chime high-yield savings account* to watch your money grow.

Pros and cons of savings

There are many benefits to savings accounts. They are generally low-risk options for saving money and can act as emergency funds you can access when needed. You can also use a savings account to save for specific expenses, like a down payment on a house.

However, there are also a few downsides to savings accounts. If you only keep your money in savings accounts, you’re missing an opportunity for the higher returns you could get from investing your money. There’s also the risk that your money will have less purchasing power when inflation is high.

Pros of savings accountsCons of savings accounts
Minimal risk with FDIC protection for bank savingsLittle opportunity for growth outside high-yield accounts
Establishes an emergency fundMore susceptible to inflation
Covers short-term expensesEasy access can lead to more spending

Pros and cons of investing

Just like savings accounts, investing has its share of pros and cons. Investing has a higher return potential than a savings account does, and there’s a lower risk of losing your money by diversifying your portfolio. Investing is also ideal for long-term goals like retirement.

However, investing does come with a risk of short-term losses since returns will vary depending on market conditions. It’s also not ideal for shorter-term financial goals, like saving for a new car. Finally, investing requires you to be disciplined with your money and ensure you’re committed to your long-term financial goals.

Pros of investingCons of investing
Higher return potentialRisk of losses
Long-term goal achievementLonger time horizons may be necessary
Risk reduction through diversificationNeeds discipline and commitment

Saving and investing are both helpful options for your money

When choosing between saving and investing money, consider the pros and cons of each option.

You can grow your money in a savings account with a high APY, but you’ll likely have larger long-term yields with investment accounts.

Investing isn’t a fit for short-term goals like building an emergency fund or saving up for a large expense; investing is ideal for longer-term goals like saving for retirement.

The ideal scenario is to keep your money in a mixture of savings and investment accounts. Doing so allows you to access money when needed while saving for your future. If your employer offers a 401(k) match, plan to contribute at least the amount your employer will match while making regular deposits in your savings account.

It’s never too late to start thinking about retirement. Here’s how to start planning for retirement in your 20s and 30s.

FAQs

What are the main differences between saving and investing?

There are several differences between saving and investing.

  • Saving allows you to build an easily accessible emergency fund or save for short-term goals, where investing is better for building long-term wealth for retirement.
  • Savings accounts usually have a lower return than investments.
  • Investing tends to have a higher return, though investing money involves more risk.

How is a savings account most useful?

A savings account is ideal for building an emergency fund if you lose your income or have unexpected expenses. You can also use a savings account to save money for a short-term goal, like a down payment on a house or a vacation.

Should I put my savings in stocks?

Although investing your money in stocks and bonds can yield long-term results, putting all your money in stocks is not advised. Instead, aim to save enough money to cover your living expenses for a few months to a year and invest in stocks and bonds for the future.

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1 Information from Experian's How Much Money Should You Have in Your Emergency Fund? as of November 5, 2023: https://www.experian.com/blogs/ask-experian/how-much-emergency-fund-should-i-have/

2 Information from FDIC's Deposit Insurance as of November 5, 2023: https://www.fdic.gov/resources/deposit-insurance/

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