Savings Money vs. Investing Money
Updated: Aug 4, 2020
Saving money: putting cash in very short term liquid accounts like a savings account. The money can be used for emergency funds, future expenses (such as a vacation), or large purchases (like a car or house). Typically the money will earn a very small amount of interest annually, as the average interest rate for savings accounts in 2015 was .08% (1). However the benefit of a savings account is that it’s considered very safe. It is recommended savings 5% – 10% monthly into a savings account for future expenses or to provide cushion in the way of emergency funds.
Investing money: the process of using money to buy an asset (stock, bond, mutual fund, etc…) with the potential of appreciation and growth. Retirement accounts are one example where money in which usually invested. However, money can be invested in non -retirement accounts to help combat against inflation or grow for future expenses. Typically investing money has the potential to earn more interest (growth) annually than saving money. The trade off for the potential to have higher returns, is a higher level of risk than saving money.
Should I save or invest my money?: It is important first to save money and build emergency funds. Once there is an adequate amount of emergency funds built up, it is time to turn your attention to future expenses. Any large purchase such as a house, car, or vacation in the next 1 – 3 years should be kept in a savings account as safety is the most important factor. For unknown or future purchases in 3+ years, money could be better served being invested to have the potential to earn more interest.
As lives are structured like a roller coaster and always changing, so too are savings and investing amounts. For example, if emergency funds have been depleted by a $5,000 trip to the hospital, focus should be shifted back to building emergency funds to an adequate level. Once that happens, money can be diverted back into investing.
The main exception to the priority rule above is putting money into retirement accounts. Retirement accounts should be contributed to simultaneously with the savings or investing 5% – 10% of monthly income.
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