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A key part of wrangling your personal finances can be building personal wealth and preparing for the future. There are various ways you can accumulate funds, such as putting your cash in a savings account or investing in the market. If you’re not sure which option is right for you (or are wondering if you should have both), then consider this deep dive into saving vs. investing accounts.
Key Points
• Savings accounts provide security and liquidity, ideal for short-term, low-risk goals.
• Investment portfolios, though riskier, can offer potential for significant long-term gains, suitable for long-term objectives.
• Multiple bank accounts simplify financial management, enhance privacy, and aid in budgeting and goal setting.
• A savings portfolio can combine savings and investments, offering flexibility and diversification for future goals.
• Starting a savings and investment plan involves setting goals, saving regularly, building an emergency fund, and learning about risk.
What’s the Difference Between Saving and Investing?
Savings accounts and investments can both help you get your finances on track for your future, but they can be used to meet very different goals. A big difference between savings vs. investing is risk.
When to Save
Think of savings as a nice safe place to park your cash and earn some interest.
You probably want lower risk on money you’ll need sooner, say for a fabulous vacation in two years. A savings account will fit the bill nicely for that goal because you want to be able to get to the money quickly, and savings accounts are highly liquid (they can be tapped on short notice).
When to Invest
With investing, you take on risk when you buy securities, but there’s also the potential for a return on investment.
For goals that are 10, 20, or even 40 years away, it might make sense to invest to meet those goals. Investments can make money in various ways, but when you invest, you are essentially buying assets on the open market; however, some investment vehicles are riskier than others.
Ways to Get Started Saving and Investing
So, what are some smart ways to start your savings and investment plan?
• First, if you’re not already saving, start today. Time works against savers and investors, so write out some of your goals and attach reasonable time frames to them. Saving for a really great vacation may take a year or two. Saving for the down payment of a house may take years, depending on your circumstances.
• One of the first goals to consider is an emergency fund. This money would ideally bail you out of an emergency, like having to pay a hefty medical bill or buying a last-minute plane ticket to see a sick loved one. Or paying your bills if you lost your job. You should save the equivalent of three to six months’ worth of expenses and debt payments available. You can use an online emergency fund calculator to help you do the math.
• When it comes to saving vs investing, investing shines in reaching long-term goals. Many Americans invest to provide for themselves in retirement, for example. They use a company-sponsored 401(k) or self-directed IRA to build a portfolio over several decades.
• Many retirement plans invest in mutual funds. Mutual funds are bundles of individual stocks or other securities, professionally managed. Because they have multiple stocks within, the account achieves diversification, which can help reduce some (but not all) investment risk.
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Do Investments Count as Savings?
While there are similarities between saving and investing, there are also very important distinctions.
• When you save, you are putting your money in a secure place. A bank account that offers Federal Deposit Insurance Corporation, or FDIC, or NCUA (National Credit Union Administration) insurance is a great example of this. You will be insured for up to $250,000 per account holder, per account ownership category, per insured institution in the very rare instance of a bank failure. And in many cases, you will be earning some interest.
• With investments, you have the opportunity to grow your money significantly over time. For almost 100 years, the average return on the stock market has averaged 10%. However, it could be higher or it could be lower. And your funds are not insured, so you might wind up withdrawing funds at a moment where the economy is in a downturn and you experience a loss.
Because of this element of uncertainty, it’s wise to understand the distinction between saving and investing.
What Are the Different Bank Accounts I Should Own?
While some first-time savers think it’s either/or, savings account vs. investing, both have their role. Savings accounts can help you get to a spot in life where you can begin investing consistently.
There are two rules of thumb when it comes to savings and checking accounts.
• On the one hand, you should own as few as you need. That reduces the strain of keeping up with multiple accounts and all those login passwords (and possibly fees).
• On the other hand, don’t neglect the benefits of having an additional savings account that you set aside for a certain purpose, like a house down payment.
You might even want to have additional different kinds of savings accounts. One could be for your emergency fund, kept at the same bank as your checking account. Another might be a high-interest one for that big vacation you’re planning. And the third might come with a cash bonus when you open it and be used to salt away money for that down payment on a home.
Having Multiple Bank Accounts
It can be a good idea to have at least one savings and one checking account. If you’re married, consider owning a joint checking account for paying family bills like the rent, mortgage, groceries, and other monthly expenses. You may also want separate accounts for you and your spouse to allow for some privacy. Decide what is the right path for your family.
There are many good reasons to open a checking account. It can be the hub for your personal finances. Money rushes in from your paycheck, and then it is sent off to pay some bills. Savings accounts are more like long-term car storage, letting you stow away money for longer periods.
Both can be interest-bearing accounts, but don’t simply look for the highest rates. Shop around for low or no fees, too. You may find the right combination of these factors at online banks, which don’t have the overhead of brick-and-mortar branches and can pass the savings along to you.
Any income for regular expenses can be placed in a checking account. If you have a business or do freelance work, maybe create a completely different checking account for it.
A savings account can be a secure, liquid spot to stash an emergency fund. You might look for a high-yield savings account to earn a higher rate of interest. These are typically found at online banks and may charge lower or no fees.
A money-market account could also be good for an emergency fund since it’s an interest-bearing account. Unlike savings accounts, however, money-market accounts often have minimum deposit requirements. Keep an eye out for the lowest limits that suit your situation. The nice thing about money-market accounts is that they also offer such features as a debit card and checks. And typically, money market accounts are insured by the FDIC for up to $250,000.
What Is an Investment Portfolio?
The difference between saving and investing can be summed up with two words: safety and risk. A collection of bank accounts suggests liquidity. It’s where you keep cash so you can get hold of it in a hurry. A collection of investment assets doesn’t have as much liquidity, because you may not want to pull your money out at a particular moment, which could be due to the funds thriving or falling, depending on your scenario. It’s riskier, but also has the potential for long-term gains.
An investment portfolio can hold all manner of investments, including bonds, stocks, mutual funds, real estate, and even hard assets like gold bars. A mix can be a good way to diversify investments and help mitigate some market risk.
When you start building your savings and investment, it’s a good idea to learn all you can and start slow. Figure how much risk you can live with. That will dictate the kind of portfolio you own.
What Is a Savings Portfolio?
A savings portfolio can mean a couple of different things:
• A savings portfolio can refer to the different ways you hold money for the future, possibly a combination of savings accounts and/or investments.
• There are also savings portfolios which are investment vehicles for saving for college.
How Should I Start a Savings and Investment Plan?
A good way to start your savings and investment strategy could be to look into an investment account. These accounts offer services such as financial advice, retirement planning, and some combination of savings and investment vehicles, usually for one set fee, which may be discounted or waived in some situations.
In addition, you’ll likely want to make sure you have money in savings. A bank account can be a secure place for your funds, thanks to their being insured. Plus, they are liquid, meaning easily accessed, and may well earn you some interest as well.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
Is it better to have a savings account or invest?
Whether a savings or investing account is better depends on your specific needs and situation. You may want both. Investing can hold the promise of high returns, but it involves risk. A savings account can grow your money steadily and securely.
How much can investing $1,000 a month give me?
The amount you make from investing $1,000 a month will vary tremendously depending on your rate of return and fees involved. It’s wise to consider the risk involved in investing, historic returns, and how much of any growth will go to paying fees.
What is the 50/30/20 rule?
The 50/30/20 budget rule is a popular way of allocating your take-home pay. It says that 50% of your fund should go to necessities, 30% to discretionary (or “fun”) spending, and 20% to savings or additional debt payments.
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