To Save or Invest? That Is the Question.

Many or all of the products here are from our partners that compensate us. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page. APY = Annual Percentage Yield
Deciding what to do with your extra cash is trickier than you might think.Image source: Getty Images.

There's no understating the importance of saving money, with one common recommendation being to save at least 20% of your income every month. Whether you're saving a lot of your income or a little, the next natural question is what you should do with it.

The answer will depend in large part on your current financial situation and how you plan to use that money. But first, we need to clarify the difference between saving and investing.

Saving vs. investing

Saving money refers to putting your money into cash products that you can withdraw from quickly and easily so that you have your money available if you need it at a moment's notice. Most people save using bank accounts, specifically saving accounts, as the old "shoebox under the bed" method isn't the most secure.

Featured offer: save money while you pay off debt with one of these top-rated balance transfer credit cards

The main advantages of saving over investing are:

  • You won't lose any money. If you put $5,000 into a bank account and don't touch it, you'll maintain your balance and even grow it if you've picked one of the best bank accounts and are earning interest.
  • You can withdraw your money at any time.

Investing is buying something that you expect to increase in value, with the point being to grow your money. Popular investments include stocks and real estate. There's more of a risk to investing because your investment could drop in value. It can also take more time to get money from an investment, because you need to sell it first.

There's one major advantage investing holds over saving, though, and that's the growth potential. High-interest savings accounts will earn a maximum of about 2% to 2.45% per year, whereas you could realistically earn 8% to 10% annually by investing.

When you should save your money

There are two situations when saving is the way to go:

  • Building your emergency fund
  • Any large purchases you expect to make within about five to 10 years

An emergency fund is a must for everyone, as it's the money you'll use to avoid going into debt if you have any type of emergency, such as a medical issue or a job loss. Conventional wisdom says your emergency fund should have enough money to cover three to six months' worth of your living expenses.

With large purchases that you'll be making within a decade or so, it's safer to save money. While investing could get you a better annual return on average, the average won't do you much good if your investments take a hit at the wrong time.

Examples of large purchases to save for include:

  • Homes
  • Cars
  • Weddings

When it's time to invest

Investing is the best way to build wealth, but only if you can afford to give your investments plenty of time to grow.

You don't want to invest any money you may need in the near future, because you risk losing money should your investment not pay off right away. With some types of investments, such as stock purchases or real estate, you also must pay fees when you buy and sell, so it's best to hold your investments for a long time to minimize how much fees cost you (and, in the case of stocks, choose one of the best brokers to avoid overpaying on those fees).

This means the ideal time to start investing is after you have your emergency fund ready to go. At that point, you can put your extra money towards investments of your choosing.

It's not always an either/or question

Although there are times when you should focus on saving and others when you should focus on investing, keep in mind that you don't have to only do one or the other.

You should save for an emergency fund if you're light on cash there, but it also always helps to get started with investing sooner rather than later. This gives your money more time to compound, and if you have an employer-sponsored retirement plan where they match a certain amount of your contributions, it's important to take advantage of that opportunity.

Instead of putting all your eggs into the saving or investing basket, you could consider splitting your extra money between those two areas as you see fit. You can build your savings in case you need it, while also getting started on growing your wealth as soon as possible.

These savings accounts are FDIC insured and could earn you 11x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.

Two of our top online savings account picks:

Rates as of Mar 28, 2024 Ratings Methodology
Advertisement
SoFi Checking and Savings American Express® High Yield Savings
Member FDIC. Member FDIC.
Rating image, 4.75 out of 5 stars.
4.75/5 Circle with letter I in it. Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
= Fair
= Poor
Rating image, 4.00 out of 5 stars.
4.00/5 Circle with letter I in it. Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
= Fair
= Poor

APY: up to 4.60%

APY: 4.35%

Min. to earn APY: $0

Min. to earn APY: $1

Our Research Expert

Related Articles

View All Articles Learn More Link Arrow