Saving versus investing (2024)

Investing Saving

3 min read

Saving and investing are both ways of setting money aside for the future. Both involve growing your money. And both should involve goals that make sense for your personal situation.

But there are a few key differences to keep in mind that can change whether you will meet your goals by saving or by investing.

On this page you’ll find

  • Saving helps you reach short-term goals
  • Savings accounts keep your money accessible while it grows
  • The downside of savings accounts
  • Investing has potential for higher returns but also more risks
  • Investing can involve more choices

Some accounts such as the Tax-Free Savings Account (TFSA), Registered Education Savings Plan (RESP), and Registered Disability Savings Plan (RDSP) can hold savings deposits and investments. Speak to your financial advisor about the strategy that’s right for you.

Saving helps you reach short-term goals

Saving involves putting aside some of your money to use in the future, often for a short-term goal. It could be as modest as saving up for a new phone or concert tickets. Or it could be building an emergency fund to help you through an uncertain time in the future.

Usually, savings goals involve a specific amount of money that you know you need to save. For example, if you want to have an emergency fund worth three months of living expenses, you’ll be able to calculate that based on your current monthly spending.

You can set aside money for savings each month or each week, depending on your cash flow. Try to make it an automatic habit by setting up direct transfers from one bank account to another.

Reasons to put aside savings:

  • Meet your short-term goals
  • Build an emergency fund
  • Start a habit of putting money aside

Savings accounts keep your money accessible while it grows

Your savings should be kept somewhere you can access quickly when you need it, but still in a secure place. For example, a savings account or a TFSA.

These accounts will also allow you to grow your money through compound interest. When you sign up for a savings account be sure to check the interest rates as well as the fees. Some savings accounts will yield higher interest rates if you keep a higher balance.

The downside of savings accounts

Savings accounts tend to offer interest rates that are lower than the rate of inflation. This means your money could have less purchasing power in the long run.

If you are paying off high interest debts such as credit cards, it may be better to pay these down first before focusing on large savings goals or investing. The interest accumulated on these debts will grow faster than the interest on your savings.

Investing has potential for higher returns but also more risks

Investing usually means buying assets or securities which hopefully, produces a return. In the long-term, investing typically provides higher returns than savings accounts.

Investments, like stocks and mutual funds, have historically provided returns higher than the rate of inflation over the long run. This makes investing ideal for long-term goals such as retirement, a home purchase or future income. If you’ve already established a savings habit and are comfortable putting aside money for future goals, investing may be right for you.

The potential for higher returns means that investing can help you accumulate wealth faster. However, investing also involves more risk than saving. When you invest, the value of your investments can fluctuate up and down, especially in the short-term. Its value can depend on many different factors, such as:

  • the type of investment
  • the performance of companies or a specific industry
  • the economy as a whole

Generally, the higher the potential return of an investment, the higher the risk. There is no guarantee that you will receive a higher return by accepting more risk and you may lose some or all your money.

Knowing your risk tolerance level is important because there is no guarantee of a certain return.

Investing can involve more choices

There are many different ways to invest. Some investment accounts are designed for specific types of goals, such as a Registered Retirement Savings Plan (RRSP). You can also invest in different products outright, such as stocks, Exchange Traded Funds (ETFs), or mutual funds. Keeping a diverse portfolio is one way to manage risk.

You can work with a financial advisor to help manage your investments based on your goals or choose an online or robo-advisor. You can also decide if self-directed investing is right for you.

Whether you are a new or experienced investor, make sure you track your progress on a regular basis. Having a clear financial plan will help you guide your choices.

Investing may be right for you if:

  • You know your risk tolerance
  • You are already in the habit of putting money aside
  • You’ve paid off high interest debt
  • You have long term goals to invest in
Saving versus investing (2024)

FAQs

Saving versus investing? ›

Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.

What is the difference between saving and investing your answer? ›

Saving is putting aside money to reach your goals. Investing is putting your money into something specific with the expectation that its value will grow over time, providing you with the opportunity to create more wealth.

What are two reasons to save instead of invest? ›

Saving provides a safety net and a way to achieve short-term goals, while investing has the potential for higher long-term returns and can help achieve long-term financial goals. However, investing also comes with the risk of losing money.

How much should I be saving vs investing? ›

invest? How much to put toward savings versus investing depends on your current needs and your future goals. If you're unable to cover three to six months' worth of expenses with savings, it's best to prioritize that before beginning to invest for long-term goals like retirement.

What happens if saving is more than investment? ›

When planned savings is more than planned investment, then the planned inventory would fall below the desired level. To bring back the Inventory at the desired level, the producers expand the output. More output means more income.

Why saving is more important than investing? ›

Risk Tolerance

Saving your money is less risky than investing it. If you invest your money, you stand to potentially lose your principal, or initial investment. Consider a situation in which you're looking ahead to a longer-term financial goal.

What is one way that saving and investing are different? ›

The key difference is this: When you save money, you're putting your money somewhere safe to use for the future, often for short-term goals. Alternatively, when you invest money, you accept a greater potential risk in return for a greater potential reward. Investing often makes more sense for long-term goals.

What is the biggest reason people choose not to save and invest? ›

They could be completely afraid to invest. It could be that their risk tolerance is very low. Maybe they just don't think they want or need any additional funds. Being content is another reason that someone wouldn't invest.

Should I invest rather than save? ›

Usually money invested over the long-term can give higher returns than savings accounts, depending on interest rates and levels of risk. Consider investing if you: want the chance of getting a higher return than you'd get putting your money into a savings account. are willing to accept an element of risk to your money.

What is the 50 30 20 rule? ›

Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

What are the reasons for investing? ›

Investing is an effective way to put your money to work and potentially build wealth. Smart investing may allow your money to outpace inflation and increase in value. The greater growth potential of investing is primarily due to the power of compounding and the risk-return tradeoff.

When to stop investing? ›

When, or if, you should stop investing in stocks is a personal decision that will vary from person to person. The right answer depends on a wide variety of factors, from your life expectancy to your health situation to your own personal risk tolerance.

Why is savings not equal to investment? ›

By definition, saving is income minus spending. Investment refers to physical investment, not financial investment. That saving equals investment follows from the national income equals national product identity.

What are two disadvantages of putting your money into savings accounts? ›

Among the disadvantages of savings accounts:
  • Interest rates are variable, not fixed.
  • Inflation might erode the value of your savings.
  • Some financial institutions require a minimum balance to earn the highest interest rate.
  • Some accounts might charge fees.
Jun 27, 2023

How much money do I need to invest to make $3,000 a month? ›

Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.

What is the difference between saving and investing quizlet? ›

What is the difference between saving and investing? Saving you are putting money away to keep and use later. Investing you are putting money in, hoping that it will increase.

What is the difference between saving and savings? ›

Saving refers to an activity occurring over time, a flow variable, whereas savings refers to something that exists at any one time, a stock variable. This distinction is often misunderstood, and even professional economists and investment professionals will often refer to "saving" as "savings".

What is the difference between saving and investment in macroeconomics? ›

By definition, saving is income minus spending. Investment refers to physical investment, not financial investment. That saving equals investment follows from the national income equals national product identity. Consider first an economy without government.

What is the simple definition of investing? ›

Investing is the process of buying assets that increase in value over time and provide returns in the form of income payments or capital gains.

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