Personal finance advice can quickly become overwhelming. We’re bombarded with messages about the importance of saving and investing, such as the idea that you should have an emergency fund, set money aside for retirement, and start investing in exchange-traded funds (ETFs).
But what is the difference between saving and investing, and how do you know which one to focus on? In this guide, I’ll break down the benefits and drawbacks of each and show you how to strike the right balance between the two.
What does it mean to save money?
The goal of saving money isn’t to get rich; it’s to build a financial safety net. Unlike investing, your priority should be protection, not growth. You want this money to be stable and accessible when you need it.
Most people keep their savings in safe accounts that earn a competitive interest rate. These can include:
- High-yield savings accounts (HYSAs)
- Certificates of deposit (CDs)
- Guaranteed Investment Certificates (GICs)
- Money market accounts
Your savings are typically best for short-term goals, such as an emergency fund, a vacation, or periodic expenses like gifts, annual subscriptions, or back-to-school costs.
What does it mean to invest money?
The main goal of investing is to build long-term wealth by putting your money to work — allowing it to compound and, where possible, taking advantage of tax-efficient accounts. For many people, that means building a portfolio that can support them in retirement.
There are several investment vehicles available, but some common ones include:
- Individual stocks and bonds
- Mutual funds and ETFs
- Retirement accounts, like a 401(k), IRA, RRSP, or TFSA
Investing carries more risk than saving. Companies can lose value or go under entirely, market downturns can shrink your portfolio, and dividends depend on company performance. That said, a higher risk could result in a higher reward later.
The differences between saving and investing
Choosing between investing and saving can be complicated. Here are a few factors to consider when deciding which is right for your situation:
Risk and volatility
If done properly, saving is generally safer than investing. Savings account balances at banks are often FDIC-insured (NCUA for credit unions) up to $250,000, which helps protect your money.
Most long-term market investments, on the other hand, aren’t guaranteed. It’s possible for them to lose value, or even go to zero. At the worst point of the Great Recession in 2008 and 2009, the S&P 500, which is a stock market index representing the 500 leading corporations in the U.S., dropped more than 57% from its peak.
But that doesn’t mean that your savings accounts are without risk. While your principal is protected, if inflation outpaces your modest interest rate, it will erode your purchasing power, making your money worth less over time.
Time horizon
When deciding between saving and investing, it’s important to consider your end goal for the money. Saving is usually best for short-term needs, while investing is typically better for the long term.
A common rule of thumb is to save money you’ll need within the next three to five years. If you can leave the money alone for more than five years, it’s generally best to invest since you have more time to wait out market downturns.
Let’s say you plan to get married within the next couple of years. You can start setting money aside in a high-yield savings account, so it’s safe and accessible when you need it. Meanwhile, if you want to buy a home in seven or eight years, you might consider investing instead.
Liquidity and accessibility
You should also think about how much access you need to the money. Your savings are often more liquid than your investments, although it depends on the account type.
If your money’s in a HYSA, you can easily access your funds when you need them. CDs, on the other hand, may impose penalties for withdrawing funds before maturity.
You can buy and sell stocks quickly during market hours, which makes them technically liquid investments. The trick, however, is that if the value has dropped, you may be selling at a loss.
Potential returns
Although savings are generally safe and accessible, investments tend to provide better returns over time.
The national interest rate on a savings account is 0.39%, but you can find better rates with HYSAs, often around 3%–5%, depending on the financial institution. The S&P 500’s returns, however, have averaged around 10% since 1957.
Investments, especially individual stocks, can also pay dividends if a company performs well. You can also use tax-advantaged investment accounts to lower your taxable income now or allow tax-free withdrawals later.
| Saving | Investing | |
|---|---|---|
| Risk level | Low | Medium to high |
| Time horizon | Short-term (under 3-5 years) | Long-term (5+ years) |
| Liquidity | High, with easy to access | Lower, and selling at a loss is possible |
| Potential returns | Lower (interest rates) | Higher (market growth, dividends) |
| Protection | Typically, FDIC/NCUA insured up to $250,000 | Not insured |
When saving makes more sense
Before you invest, it’s important to have an emergency fund with three to six months of expenses. That way, if an unexpected bill comes up, you won’t have to take on debt or sell investments at a loss to cover it.
Saving is also best if you’re preparing for an upcoming goal, like holiday gifts or a car down payment.
You should always pay off any high-interest debt before you invest, since the return is often higher and guaranteed. For example, you’ll save more by paying off a 25% APR credit card than you would earn in the S&P 500, assuming a 10% average annual rate of return.
When investing makes more sense
Once you’ve finished your emergency fund and paid off your high-interest debt, you can usually start focusing on investing, as long as you won’t need the money for a while.
That said, if your employee benefits include 401(k) contribution matches, you should probably prioritize those before you complete your emergency fund, since a match is essentially free money.
401(k)s and other retirement accounts, such as IRAs, RRSPs, and TFSAs, can also offer tax advantages. Contributions could lower your taxable income for the current year or allow tax-free withdrawals later on, adding to the return potential of investing.
Why most people need both
Saving and investing isn’t an either/or situation. Most people need both, and they actually work better together.
Without savings, an unexpected expense, such as a car repair or medical bill, can force you to pull money out of your investments at the worst possible time. A solid emergency fund prevents you from making panic decisions with your portfolio.
On the flip side, parking all your money in a savings account means missing out on the power of compound returns. The longer your money stays invested, the more it will grow — and give you time to ride out market dips. Investing early also lets you take advantage of tax benefits through accounts like a 401(k), IRA, RRSP, or TFSA.
In short, your savings can protect you today, while your investments build your future.
Summary
When it comes to saving vs. investing, both play an important role in a healthy financial life.
Saving builds your safety net. It keeps funds accessible for emergencies, so you’re never forced to take on debt or sell your investments at a loss.
Investing, on the other hand, lets you take advantage of compound growth over the long term. While it comes with risk, investing provides higher potential returns.
Budgeting is what makes both possible. Lunch Money can help you create custom categories for your savings and investments, identify your surplus, and track your contributions over time. Start your 30-day free trial today to start growing your net worth.
