What is the difference between saving and investing?

Both saving and investing have pros and cons, and the best choice depends on your reasons for saving money. Some questions to ask yourself before determining if you should save or invest are: Do I need to be able to easily access my money? Do I intend to save this money for a relatively short or long period of time? Am I willing to earn more money if it also means the possibility of losing more money?

Saving money in a bank is safe, easily accessible, but earns little interest. When compared to investing, there is less risk of losing money if it is kept in a savings account. Depending on which type of savings option you choose—CD, savings account, or money market, for example—you typically do not need a large sum of money to open an account. If you hope to take your money out of savings in a few months, or if you want it to be accessible in the case of an emergency, a savings account would give you that convenience and ease of access. However, if you plan on letting your money sit for an extended period of time, it won’t earn a lot in a savings account, as interest rates are low. Savings accounts also do not protect against inflation, or “purchasing power risk,” which becomes a greater threat the longer your money sits.

Investing can be riskier, but it can also lead to greater reward, and it is usually better option for long-term savings goals (for example, three years or longer). There are several options for investing, including stocks, bonds, and mutual funds. Investments can increase or decrease in value quite rapidly, so the risk involved depends on your type of investment, where you invested your money, when you sell your investment, and other factors, including the fact that your money is not federally insured. However, your potential to earn more money is greater, especially over an extended period of time. One way to help avoid risk is to diversify, or invest in a variety of places (in other words, don’t put all your eggs in one basket). Because of the risk involved as well as the long-term, less accessible nature of investments, investing is a good decision for those who are financially stable and have money secured elsewhere, such as in an emergency fund and/or savings account.