While saving and investing are both important in helping you achieve a more secure financial future, you need to know when to save and when to invest. The difference between the two depends on your financial goal, time frame, and the amount of risk you’re willing to take. Read on to learn the key differences between saving and investing, and how each strategy can help you create long-term wealth.

Saving Money

Saving money is the process of putting away funds in a safe account for a future expense or emergency. You want the cash to be available quickly. Savers typically opt for money markets or high yield savings accounts that will earn interest and not penalize for withdrawing cash in a pinch. These accounts should also be FDIC insured so your money stays safe. Of course, “safe” means a lower return when compared to the potential benefits of investing.

Investing Money

Investing, like saving, involves stashing money away for the future, but you’re willing to put in some risk in order to possibly achieve a higher return. Stocks, bonds, mutual funds, and exchange-traded funds (ETFs) are all typical avenues of investing. Investment brokers or brokerage firms help buy and sell your investments. Your funds should stay put in the chosen investments for at least three to five years as investing can be volatile in the short term, sometimes even losing money. This is why money that might be needed more quickly should be kept in savings.

When to Save vs When to Invest

• Save when your financial goal is less than three years away, you’d prefer to play it safe with your funds, you need an account with quick access to cash, and you want principal protection or FDIC insurance.
• Invest when your financial goal is at least three to five years away, you’re prepared to take some risk in exchange for a greater potential return, you want to watch your money grow, and you’re okay with enduring stock market volatility.

Save First or Invest First?

Investing money should only come after you’ve built a foundation from saving money. Your savings will equip you with the capital you’ll need to maintain and bolster your investments. If you forgo saving in lieu of investing and find yourself in a financial hardship, you might be forced to sell out your investments at the worst possible time, which is not a method for building wealth. An exception to this is distributing a portion of your paycheck to a company-provided 401(k) plan, especially if your company matches contributions. You should plan to save up enough for three to six months of expenses in case of financial disaster such as a job loss. This includes mortgage, loan payments, insurance costs, and utility bills, as well as grocery and clothing allowances. Once you have a sufficient savings built up, you can begin to invest.

When It’s Time to Invest

Investing helps you save for long-term goals like retirement, a down payment on a house, or paying for college. Once your short-term saving goals are in order, you can begin to invest and take advantage of compound interest, which allows for more rapid growth of funds over time. As noted above, the best place to begin is an employer-sponsored 401(k) plan. If you want to get more aggressive with investing, it’s not recommended in this current pandemic era to teach yourself day trading or complicated investing methods unless you are prepared to lose some money. Instead, seek out a trusted financial planner who can help you set goals and look out for your best interest as you build your path to wealth.