Both saving and investing involve putting your money aside for specific reasons — but the key distinction between these terms comes down to purpose.

Read on to explore saving vs. investing and discover why the former nearly always involves some form of the latter.

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What is saving & how does it work?

Financial saving means putting aside part of your income for the future instead of spending it right away. The purpose is to fund short to medium-term goals.

You can think of saving in two ways:

1. Saving for upcoming expenses: Saving can refer to regularly setting aside money to prepare for an upcoming expense. This may include saving for a wedding, tuition fees, a new home, or a dream car. 
2. Saving for your financial future: Saving can also refer to putting money toward strengthening financial health. This may include setting aside cash for an emergency fund and to pay down debt.

Saving example

Hypothetically, say you earn $65,000 after tax and have monthly expenses of $3,000. Your main short-term financial priority is building a fully-formed emergency fund equal to six months of living expenses — $18,000.

If you save 15% of your income, you’ll build your emergency fund in about 22 months. At 20%, it would take 17 months. To reach your goal in one year, you’ll need to save approximately 28% of your income.

Emergency fund tip: As you build your emergency fund, you may want to place it into a high-yield savings account — some banks offer interest rates as high as 4%. That way, your money can accrue interest while remaining accessible.

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Pros and cons of saving money

Consider the pros and cons of saving to better understand if it’s worthwhile in your situation.

Pros

• Saving is predictable: Saving is easily quantifiable. For example,  by placing $1,000 in a non-interest bearing emergency fund each month for one year, you’ll have saved $12,000. 
• Saving strengthens your financial health: By putting money aside to pay down debt and build an emergency fund, you both strengthen your financial health and gain peace of mind. 

Cons

• Saving isn’t inflation resistant: If you placed $1,000 into a non-interest bearing bank account 30 years ago, that same $1,000 would now be worth the equivalent of $326. That’s because, historically, inflation reduces purchasing power by 3.8% annually. 
• Saving doesn’t produce strong long-term results: Some institutions offer high-yield savings accounts. While these are beneficial for meeting short-term savings goals, they don’t deliver the same long-term results as other savings vehicles.

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What is investing and how does it work?

Investing refers to putting your money into assets like stocks, real estate, or businesses that you believe will grow your money over time. From privately lending your friend money for a small interest rate to acquiring shares in a large multinational conglomerate, investing covers a broad spectrum of situations. And every asset is different: 

• Some are speculative (cryptocurrency and startup investments), while others are conservative (government bonds and certificates of deposit (CDs)).
• Some have low barriers to entry (index funds and fractional share investing), while others require a high initial investment (hedge funds and commercial real estate).
• Some are publicly available (stocks traded on major exchanges), while others are private (venture capital opportunities or private equity funds).

With that said, all assets share the same purpose — to produce a strong return on investment.

Investing example

Hypothetically, say you decide to contribute 15% of your $70,000 after-tax annual salary into an S&P 500^® index fund, through your 401(k). You would be making monthly investments of $875. Historically, this asset may likely return an average of 10.9% annually (or approximately 6% adjusted for inflation). 

By being disciplined and investing consistently, here’s approximately how your monthly investments of $875 could grow over time:

• After 10 years: $188,000
• After 20 years: $747,500
• After 30 years: $2,400,000
• After 40 years: $7,300,000

If you instead decided to put that money into a standard savings account with a bank offering 3% interest, you would have approximately $800,000 after 40 years. 

Investing tip: Aim to invest 15% of your income. Consistently investing at least this amount throughout your career can allow your funds to compound into a healthy retirement nest egg.

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Pros and cons of investing money

Let’s consider the pros and cons of investing.

Pros

• Long-term gains: Investment vehicles promise greater returns than regular savings accounts. Strong investment vehicles not only outpace inflation but also generate returns that drive long-term financial health. 
• Easily accessible: In the past, many investment vehicles were difficult to access. Today, because of the rise of digital investment mediums, access has never been easier. 

Cons

• Patience: Investing is a long-term game. Building a strong investment portfolio requires you to stay disciplined over time, sticking to your financial plan. 
• Volatility: In the short and medium terms, investment vehicles are generally volatile. But in the long term, many investment vehicles offer a reliable, conservative way of building wealth.

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When to save and when to invest

Here are some insights on when and how to focus on saving versus investing. 

• Saving to meet short and medium-term goals: Ensure that you save to have a fully formed emergency fund (equal to 3–6 months living expenses) and are debt free. These should be your savings priorities. 

• Investing to meet long-term goals: Once you’re debt-free and have an emergency fund, you’re then in the best position to invest. For its tax advantages, consider investing through your company’s 401(k) — 80% of U.S. millionaires use theirs. If you don’t have access to a 401(k), Roth IRAs are another effective investment vehicle. 

75% of U.S. millionaires attribute their investing success to regular, consistent investing over a long period. As you build wealth, consider regularly investing in diversified assets with a strong historical track record. For example, many in the U.S. build their wealth through broad-based index or mutual funds, such as an S&P 500^® index fund. These are available through most 401(k)s.

As you approach retirement, consider shifting your portfolio toward conservative, income-generating assets. The assets that may offer a secure retirement income include CDs, bonds, and annuities.

Certificate of deposits

CDs are savings accounts that offer a fixed income. They typically yield 0.23–1.82% annually, compared to the 0.41% average for standard savings accounts. Plus, the FDIC guarantees CDs up to $250,000 per depositor. 

Unlike traditional savings accounts, CDs require you to lock in your principal for a set term. Terms can be as short as three months and up to five years. Early withdrawals usually result in fees.

Treasury bonds

Bonds are loans that investors provide to entities, such as governments or companies. In return for the loan, these entities repay the principal amount plus interest over time. Treasury bonds are a common type, offered by the United States Treasury. 

Many investors choose Treasury bonds for their stable income, because a treasury bond’s coupon rate (its fixed interest rate) stays constant over its term. Investors receive interest payments every six months based on this rate.

Annuities 

Annuities are a contract between you and an insurance provider, where you contribute (either a one lump sum or installments) in return for principal protection and income throughout retirement. On average, annuities may offer higher returns than CDs. 

Two common annuity types are fixed and variable annuities:

• Fixed annuities: A fixed annuity guarantees a set rate of return for a specific period or life. While it provides stable income, it lacks potential for market-based growth.
• Variable annuities: Variable annuities are tied to market-linked subaccounts. If the subaccount performs well, so does the variable annuity. This offers greater potential gains, but less predictability. 

Other types include deferred annuities, immediate annuities, and fixed index annuities. Each type caters to different preferences, so consider your priorities and circumstances when choosing an annuity.

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Should you save and invest at the same time?

The answer is yes, but with one exception. 

Avoid saving for an emergency fund, paying down debt, and investing in assets all at once. As a general rule, it may be best to build an emergency fund and pay down debt first, and invest second. Effective financial planning not only builds wealth but also provides peace of mind. Prioritizing an emergency fund and becoming debt-free helps achieve both.

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This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.