Saving and investing are two very different financial strategies. Once you understand the difference between saving and investing, you may do a better job of managing your money. Why? You’ll have a better grasp on when it’s appropriate to save money, when it’s better to invest, and which financial products are right for each goal.
What's the Difference Between Saving and Investing?
Many people use the terms "saving" and "investing" interchangeably. While these two concepts are related, they aren't exactly equal.
What is saving?
Saving essentially means storing your money to use in the fairly near future. You might deposit this money into a bank savings account.
What are the advantages of putting money into savings?
Saving is a good strategy if you’ll need your money in a short time. While interest rates spiked to more than 9% in 2022, since then it has gradually fallen toward the Federal Reserve’s long-term target of 2%. Good news for savers – interest rates on high yield savings accounts and CDs are beating inflation.1
More important reasons to put money into savings might be that you:
- Won’t lose money: In most cases, savings accounts are insured against loss by organizations like the Federal Deposit Insurance Corporation (FDIC).
- Can access your money quickly: When you need your money, you can usually withdraw it without any financial penalty up to a certain number of withdrawals per month, after which you may have to pay a fee.
What are the risks?
Your money may not earn the highest potential yield. In fact, if your savings interest rate doesn’t keep up with the average cost of living, you lose some of your money’s buying power over time.
What financial goals call for saving rather than investing?
Consider putting money into a savings-type account if you need it within in a short time. A typical market cycle is five-to-seven years, so if you need the money in less time than that, it’s a good idea to put it in a savings account. Saving is also a good strategy if you plan to completely fund the goal yourself, and don’t need to rely on your money growing significantly.
Examples of savings goals include:
- Car down payment
- Vacation money
- Down payment for a home you’ll buy in seven years or fewer
- Home improvement projects
- Building an emergency fund
What financial accounts should you consider for storing savings?
Typical savings options include:
- Bank/credit union savings accounts
- Interest-earning checking accounts
- Money market accounts
- Certificates of Deposit (CDs)
- U.S. Treasury bills and savings bonds
What is investing?
When you invest, you expect to earn money on your investments over time—typically more than you could earn with a savings account, over the long term.
Because investments, such as stocks, bonds and mutual funds, are connected to the financial markets, your account values may go up and down according to changes in the economy.
What are the advantages of putting money into investments?
Investing is often a smart strategy for achieving longer-term financial goals. When you don’t need your money right away, you can afford for your investments to fluctuate in value. In addition, you can:
- Give your financial goals a head start: Investing may help you earn more money in returns than you could just by saving.
- Participate in global financial markets: Even if you don’t own a profitable, global business, you can share in its success. How? By buying a company’s stock or owning a mutual fund that invests in companies.
What are the risks?
Investments may climb in value when financial markets are doing well, the economy is improving, or a company’s profits are growing. However, investments can also lose money when the market declines or a company’s performance slumps. It’s possible to choose low-risk investments. However, they usually earn less over time.
What financial goals might require investing instead of saving?
Investing can be a good approach when you have longer-term financial goals or need to earn significantly more money than you could by saving it.
Consider investing for:
- Retirement
- College costs
- Down payment for a house you plan to buy in 10+ years
- Starting a business
- Leaving a financial legacy for your family
What types of financial products or assets are considered investments?
There are many different types of securities in which people invest. Common investment options include:
- Stocks
- Bonds
- Mutual funds
- Exchange-traded funds (ETFs)
- Real estate
- Real estate investment trusts (REITs)
A healthy mix of saving and investing
Most people benefit from a diversified approach to their finances that includes both saving and investing. For instance, you might store money in a savings account for your end-of-year property tax payments or next summer’s vacation. At the same time, you might invest money you’ve earmarked for a future business opportunity and for retirement.
Footnotes:
1 CNBC, 2024, Inflation falls 0.1% in June from prior month, helping case for lower rates, https://www.cnbc.com/2024/07/11/cpi-inflation-report-june-2024.html(opens in a new tab)
Disclosures:
Investors should carefully consider the investment objectives, risks, charges and expenses of a mutual fund, ETF or REIT before investing. The prospectus contains this and other information about the investment. To obtain a prospectus, contact your Financial Advisor or visit the investment company’s website. Please read the prospectus carefully before investing.
Stocks fluctuate in value and may be worth more or less than their original cost. Past performance is no guarantee of future results.
This article has been prepared for informational purposes only. The information and data in the article has been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be appropriate for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Diversification does not guarantee a profit or protect against loss in a declining financial market.
Under the Savings program (“Savings”), Morgan Stanley Smith Barney LLC makes available interest-bearing FDIC insured deposit accounts(s) at either Morgan Stanley Private Bank, National Association or Morgan Stanley Bank, N.A., each a national bank, Member FDIC, and an affiliate of Morgan Stanley Smith Barney LLC, as selected by the client. Deposits placed in Savings are eligible for FDIC insurance up to $250,000 (including principal and interest) per depositor, per each bank selected by the client for all deposits held in the same insurable capacity (the Maximum Applicable Deposit Insurance Amount). All deposits per bank held in the same insurable capacity will be aggregated for purposes of the Maximum Applicable Deposit Insurance Amount, including deposits maintained through the Bank Deposit Program. You are responsible for monitoring the total amount held with each bank. The bank also reserves the right to offer promotional rates from time to time. Detailed information on federal deposit insurance coverage is available on the FDIC’s website (https://www.fdic.gov/deposit/deposits/). The Savings program is not intended for clients who need to have frequent access to funds and those funds will not be automatically accessed to reduce a debit or margin loan in your brokerage account. Withdrawals from an account in Savings are limited to 10 transactions per calendar month, and any withdrawal or transfer over the limit in any one calendar month will be subject to an excess withdrawal fee.
© 2024 Morgan Stanley Smith Barney LLC. Member SIPC.
CRC#3677974 (07/2024)
