Saving up for that hot new video game was simple back in the day. Do the chores. Collect the cash. Throw it in your sock drawer. But now, you’ve got bigger dreams to fund, like vacations, homes, or new furniture for your apartment.
You may be thinking that it’s time to get serious about saltwing away more money. Or you may be wondering what is the difference between saving and investing and which is better for your goals.
Read on for insights around saving vs investing, the account options available to you, how many accounts you should own, and, when it comes time to invest, how a portfolio of investments can help you reach long-term goals.
What’s the Difference Between Saving and Investing?
Savings accounts and investments can be used to meet very different goals. Think of savings as a nice safe place to park your cash. With investing, you take on risk when you buy securities, but there’s also the potential for a return on investment. But a big difference between savings and investing is risk.
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 in a very short amount of time).
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.
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. You should save the equivalent of three to six months (or more ) of expenses and debt payments in your e-fund.
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.
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. On the other hand, don’t neglect the benefits of having an additional savings account that you set aside for a certain purpose, like that house down payment.
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.
Checking accounts act like bus stations for your money. Money rushes in from your paycheck and it hangs around for a short time before being 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 fees, too. An option like SoFi Money™ cash management account could be a good solution because it doesn’t have any account fees.
An emergency fund can be tucked away in a cozy savings account, and 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 money-market account could be good for an emergency fund that has grown to several thousands of dollars, or for a windfall you didn’t expect. It’s an interest-bearing account, and while it historically carried higher interest rates than savings accounts, some savings accounts rival money-market account rates. It’s important to remember that a money-market account is technically still an investment account—it just offers a shorter-term portfolio meant to keep your assets liquid.
Unlike savings accounts, money-market accounts often have minimum deposit requirements—as much as $10,000. Keep an eye out for the lowest limits that suit your situation. The nice thing about money-market accounts is you can often make up to six transfers or withdrawals each month. And typically, money market accounts are insured by the Federal Deposit Insurance Corporation (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 when an investment is thriving. 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 is a way to diversify investments and 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.
How Should I Start a Savings and Investment Plan?
A good way to start your savings and investment strategy is to look into an invest account. These accounts offer services such as financial advice, retirement planning, and some combination of savings and investment vehicles, usually for one set fee. In some cases, fees may be discounted or waived if you meet certain deposit or contribution levels.
For example, an automated SoFi Invest® account has no SoFi management fees, and members can get complimentary access to financial advisors to help with setting goals. Savers can get started with as little as $20 in contributions per month. Plus, consumers can tap other features, like professional career guidance and exclusive SoFi events.
So, remember, it’s not saving vs investing. It’s both. Each has a place in your financial plan. Each has its own role. And each can help you reach your big goals like retirement as well as your small goals, like a video game.
Choose how you want to invest.
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