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Saving vs Investing: Understanding the Key Differences

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Learn the differences between saving and investing and which is better for your financial goals.

saving vs investing

Saving and investing are two terms that are often used interchangeably, but they have very different meanings. Saving refers to putting money aside for a specific goal or emergency, while investing involves putting money into assets that have the potential to grow in value over time.

Checking accounts, MMAs (money market accounts), CDs (certificates of deposit), and investment accounts are all alternatives to savings accounts that are worth considering. Each type of account has its own advantages and disadvantages, so it's important to do your research before choosing which one is right for you.

While saving and investing money go hand in hand, you may be surprised by which has more impact on wealth. According to Bankrate, investing has a greater impact on long-term wealth than saving alone. This is because the potential returns from investing in stocks, bonds, and mutual funds are typically higher than the interest rates offered by savings accounts.

In the pursuit of any financial goal, it's smart to stop and consider whether to save or invest the money you set aside for it. For short-term goals, such as saving for a down payment on a house or buying a car, saving is typically the better option. This is because the money is needed in the near future and there is a higher risk of losing money if it is invested.

On the other hand, for long-term goals like retirement, investing is usually the better choice. This is because the money has a longer time horizon to grow and there is a greater potential for returns. Over the long-term, the stock market has historically provided returns that are higher than the rate of inflation, which means that investors are able to maintain their purchasing power over time.

Saving and investing are both key parts of a solid financial plan. Whether you're putting money into the best savings account – be that the highest interest rate savings account or a high-yield savings account – or investing in a diversified portfolio of stocks, bonds, and mutual funds, it's important to have a plan in place that aligns with your financial goals.

When you're in your 20s, you may not feel as if you have a lot of money yet, but you do have a savings and investment advantage that many older people don't have – time. By starting to save and invest early, you have more time for your money to grow and compound over time. This means that even small contributions can add up to significant savings over the long-term.

The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, so it's important to consult with a financial advisor before making any investment decisions.

Interested in simplifying your financial life? You're not alone. After all, most people's finances are too complicated. By focusing on your financial goals and choosing the right mix of savings and investments, you can create a plan that is easy to understand and follow.

So which is better, saving or investing? Well, the answer depends on your short-term or long-term goals. If you need the money in the near future, saving is usually the better option. But if you have a longer time horizon and are willing to take on some risk, investing can provide greater returns over the long-term.


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