Saving vs Investing: What's the difference?
To save is to put money aside a little at a time, usually to get something specific like a holiday, to buy a house, or just to splurge.
If you have a pile of cash and are wondering whether to save or invest it, you’ve come to the right place. If you don’t have a pile of cash - like most of us - and are wondering how to get one, you’ve also come to the right place. If you’re sitting there wondering, “What’s the difference?” - welcome.
What’s the difference?
To save is to put money aside a little at a time, usually to get something specific, like a holiday, to buy a house, or just to splurge. You might also save for emergencies that may come up like that car that seems to only break down at the worst possible moment. You would likely put the money in a place where it can be accessed relatively quickly, like in a checking account or high interest savings account.
To invest is to grow your money by buying things you think would increase in value, like company stock. As an example, when DoorDash went public on Dec 9th, a share in their company was priced at $102. By the end of the day, the same share was valued at $189.51. Anyone who bought a share that morning would have been $87.51 richer by the end of the day.
So should I save or invest?
That depends on your financial goals and current situation. The only time you shouldn’t save or invest is when there are more pressing things to do with your money, like getting debt under control, especially high interest debt like with credit cards.
When to save
If you don’t have an emergency fund
It’s called an emergency fund because emergencies come when you least expect it, and it won’t care that you have no way to support yourself when the time comes.
It is generally advisable to have 3-6 months' worth of living expenses saved up in a quickly accessible savings account for rent, food, etc. This, of course, means that you should be aware of how much you spend in a month.
If you have a steady paying job, a safe idea might be to have 3-6 months' worth of your paycheck saved up.
When you have your emergency fund
A general rule of thumb is to save 10% - or whatever you can afford - of your income towards something else you’d like to get, like a splurge or a holiday.
How to invest
Investing is a good idea when you have your emergency funds handled and your debt under control.
The how depends on your financial goals - short, medium, and long term. Short-term goals are things you plan to achieve within 3-5 years, medium-term goals are for 5-10 years, while with long-term goals, you won’t need the money for more than 10 years.
Over the long-term, the stock market tends to do better than cash accounts because inflation can affect the value of money in cash accounts. If you’re more risk averse, a good option could be to spread your money across different investments instead of focusing on only a few.
Deciding what to invest in and how to go about doing it is not a trivial thing, so a lot of people turn to investment managers to track the health of their investments.