Don’t make the mistake of thinking saving and investing are the same thing. While hopefully both will give you more money than you started with—that’s about the only thing they have in common.
As we talked about in other parts of this site, savings can come in many forms: checking and savings accounts, money market accounts and certificates of deposit. All they can do is earn interest. Investing is basically buying something: stocks, bonds, mutual funds and real estate. You’re a shareholder and earn dividends instead of interest, with the hope of the stock, bond, fund or property increasing in value when you sell it.
Another big difference between saving and investing is the risk involved. When you save, there is no risk. You are guaranteed to get back the money you put away, plus interest. The downside is the interest rates aren’t major, and it may be hard for you to get your money out on short notice.
Investing can be a risky business. Depending on the investment, the risk could be huge. The bigger the risk, the bigger the potential payoff. You’ll also see the best returns the longer you invest in something. Thanks to the volatile nature of the market, anything less than five years and you might not see enough change for the investment to be worth it. But if you’re looking to invest longer than five years, this will give the market a chance to correct itself and hopefully bring you a nice profit.
With saving vs. investing, it all boils down to three questions you need to ask yourself:
Once you find your answers, it should be clear whether saving or investing is the right choice for you. Do that math with our savings calculator.