Understanding saving vs. investing
Should you save or invest your money? That depends on your goals, time frame, and what’s called “risk tolerance.” Risk means the possibility of losing some or all of your money. The higher the risk of a particular savings or investment choice, the higher is the potential reward (what you potentially can earn). Generally, investment products such as stocks and mutual funds can grow your money more than traditional savings options over the longer term, but they are riskier.
Another big difference between savings and investments is time. “Savings” is money you want to keep safe but available for emergencies and short-term goals. You also might save in order to accumulate money to invest later. "Investments" enable you to pay for longer-term goals such as going to graduate school, buying a better car, or retiring.
Here's a comparison of some savings and investments options:
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Type
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Some Options
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Reasons You May Want to Own
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Disadvantages
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Savings
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- Savings accounts
- Money market accounts
- U.S. savings bonds
- Certificates of Deposit (CDs)
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- Usually pay a specific interest rate for a set period of time
- Do not go up and down in value
- Easy to access
- Safe
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- Usually pay lowest rates
- Some charge penalties for withdrawals before a specified date or after a certain number
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Investments
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- Stocks
- Bonds
- Mutual funds
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- Earn money several ways: what they pay in interest, what they pay in dividends, or how much they change (appreciate) in price between the time you buy them and when you sell them
- Offer the potential to earn higher returns than savings
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- Go up and down in value, sometimes dramatically
- Can be penalties for withdrawals before a specified date
- Takes time to withdraw funds
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