Should you save your money or invest it? 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. Generally, investment products such as stocks and mutual funds have the potential to 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 so that it’s readily available for emergencies and short-term goals. Investments are generally intended for longer-term goals, such as paying for graduate school, buying a better car, or financing your retirement.
The following chart compares some advantages and disadvantages of saving vs. investing.
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SAVING
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INVESTING
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Types of Options
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- Savings accounts, money market accounts, and U.S. savings bonds
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- Stocks, bonds, exchange-traded funds and mutual funds
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Advantages
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- Usually pay a specific interest rate for a set period of time
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- You can earn money by 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
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- Do not go up and down in value
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- Offer the potential to earn higher returns than savings provide
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- May be eligible for preferential income tax treatment
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Disadvantages
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- Value may drop quickly and unexpectedly, sometimes by large amounts
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- Some charge penalties for withdrawals before a specified date or after a certain number of withdrawals
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- May involve higher costs and expenses for use
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Talk to your parents, friends, and relatives to get their perspectives on the risks and rewards of savings versus investing.