Break it down: Saving vs. investing
Editorial staff, J.P. Morgan Wealth Management
- Saving generally means putting money into a bank account. A low-risk strategy, saving is generally used for short-term goals, like establishing your emergency fund or paying down credit card debt.
- When you invest in the markets, you buy securities such as stocks, bonds, mutual funds or exchange-traded funds (ETFs). Investing involves higher risk than saving and is typically used for long-term goals like retirement.
- There is generally a trade-off between risk and return: while investing generally carries higher risk than saving, it can offer the potential for higher returns over the long run.
When you save or invest, you are making the choice to put money away for your future. Whether your goals are taking a family vacation or the retirement of your dreams, knowing how to use both saving and investing strategies can help you get there.
What’s the difference between saving and investing?
Saving – putting money into a bank account – is generally used for short-term goals, like establishing your emergency fund and paying down credit card debt. Investing, on the other hand, is typically used for long-term goals, like retirement. When you invest in the markets, you can buy securities such as stocks, bonds, mutual funds or exchange-traded funds (ETFs).
There is generally a trade-off between risk and return: While investing generally carries higher risk than saving, as your investment account could potentially lose all its value, it can also offer the potential for higher returns over the long run. If you save in a bank account, your money is insured by the Federal Deposit Insurance Corporation (FDIC), up to specified limits in the event of a bank failure. Meanwhile, investment accounts may be insured by the Securities Investor Protections Corporation (SIPC) up to specified limits in the event of a brokerage failure.
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Saving vs. investing
Saving for your financial goals | Investing for your financial goals |
|---|---|
Purpose | |
Saving is primarily used for short-term goals, such as building an emergency fund, paying off debt and maintaining liquidity. | Investments typically aim at long-term financial goals, such as retirement or wealth building, with an emphasis on potential growth. |
Risk level | |
Saving is considered lower risk, since your money is less subject to market forces. Many savings accounts are additionally insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. | Investing is considered a higher risk due to the inherent potential volatility of the market. Though risk levels vary between individual investments, all investments have a potential chance to lose value. On the other hand, investments might also jump in value, often significantly faster than savings ever could. Investments are typically not insured by a government agency. |
Potential returns | |
Saving typically offers limited growth potential, due to modest interest rates. | Investing offers the potential for higher returns, especially in favorable market conditions. |
Impact of inflation | |
Savings may not grow faster than inflation, potentially diminishing the purchasing power of saved funds. | Investing offers a potential for returns that outpace inflation, making investing a possible hedge against rising costs. |
Market sensitivity | |
Saving is typically considered more stable, as the underlying value of stored funds isn’t directly affected by market fluctuations. Interest rates, however, may vary. | Investing carries a potential risk of reduced market value during market volatility, though long-term investment strategies may still outperform savings over time. |
Account types | |
Saving typically relies on deposit accounts such as savings accounts or certificate of deposit (CD) accounts. | Investing uses a variety of investment vehicles like stocks, bonds, mutual funds and more. |
How does inflation impact my goals?
Inflation is when the price of goods and services rises. So while a $100 bill may look, smell and feel the same a year from now, with inflation, it may be able to buy less. When you save, your money typically doesn’t grow as fast as inflation rises. When you invest as well as save, a higher return potential from investing may help you keep up. Inflation is one of the many reasons experts often discourage keeping your cash on hand and instead recommend that you put it in an interest-bearing account.
What if I invest and the market goes down?
It’s human nature to worry that you’ll invest at the “wrong time.” But even in a poorly performing market, you may still get a better outcome with investing than you would with just saving. Let’s consider potential outcomes for either saving or investing $500 monthly over 20 years. At the end of that period, a savings account would total $125,818. In contrast, the same amount invested could potentially grow to $199,722 in a portfolio with hypothetical forward-looking returns of 5%.
So it’s important to understand your goals, how long until you need the money and how much risk you’re comfortable with taking on when considering how you want to save and invest.
Can I save and invest at the same time?
Yes, you can do both. First, consider building an emergency fund by putting away three to six months’ worth of expenses and consider paying down high-interest debt. When you’re ready, a common rule of thumb is aiming to put aside at least 15% of your pre-tax income every year that can go toward retirement and investing accounts.
Unsure how to begin? Consider connecting with a J.P. Morgan advisor who can help you create a plan aligned to your goals, time horizon and risk tolerance.
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Editorial staff, J.P. Morgan Wealth Management
