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Savings vs. Investments — Do You Know the Difference?

by Jackie Beck

Growing your money with savings and investmentsDo you know the difference between savings and investments? Of course, you invest money into the stock market or other things, and you deposit money into a savings account.

But there is in important difference beyond the terminology and where you put your money. Knowing and understanding what that is can have a huge impact on your money.

Purpose matters

In the simplest sense, the difference between savings and investments is that when you save money, you hope to keep all of it for a particular purpose. When you invest money, you hope to use that money to make even more money than what you put in.

You probably have an end goal in mind for investments too — such as retiring or building up wealth to leave to your children someday — but that goal is something that’s in the distant future.

Savings goals are usually more short term and specific: you want to take a trip, buy a house, etc.

Of risk and return

The key differences between savings and investments though are the level of risk and potential return. In this case, risk is the chance that you will lose money, and potential return is the possibility that you will make money.

When you deposit money into an FDIC or NCUA insured account, generally the only risks to your money (so long as you stay below the insurance limits) are a total financial collapse of the economy and/or the risk of what it will buy in the future decreasing due to inflation. Other than those things, the money is pretty safe. But in return for that safety, you get paid little or no interest.

On the other hand, when you invest money you can lose every last dime. (However the likelihood of that happening varies depending on what you invest in.) The upside to investing money is that you hope to make a profit. The bigger the hoped-for profit, the bigger the potential risk. (Really big hoped-for profits moves you out of investing and into the realm of speculation or scams.)

Striking a balance

Those factors are why the only money I invest is money I can afford to lose completely. If I had put my emergency fund into stocks in August of 2008 and needed to use it the next month, I would have been in trouble because a good chunk of it would have been gone.

So I left my emergency fund alone, and bought stocks with other money instead. Of course I hoped to gain, but when my investing accounts dropped by 40% it wasn’t a critical issue. (Just depressing.) I still had the savings sitting there in case it ever needed to be used for its intended purpose.

Know your objectives

The differences between savings and investing means that it’s important to know your objectives for the money, your real level of risk tolerance, and how much time you expect to have before you’ll need the money. Once you know those things, you can start to look into the vehicles for saving and investing. Then you can place a portion of your money toward each goal, and give yourself the best shot at long-term financial success.

Posted in Savings on 02.13.13 with 6 comments.

6 Responses to “Savings vs. Investments — Do You Know the Difference?”

  • Sarah Park says:

    Thanks for making things clear to me. I always thought these are just the same and I’ll chose which should I prefer.

  • Elizabeth says:

    I know a lot of people who consider their savings to be their “nest egg” – and I can’t believe how short-sighted they are! I even know some people who consider a CD an investment… to me, that’s a glorified savings account!

  • Chris says:

    Great post. Too many people think saving is the only step for retirement but they don’t consider inflation, although not a problem right now, eroding the value of their cash. With people living longer many outlive their savings rather quickly.

  • Great information and guidance here. It is important to understand that savings need to be kept safe even if the interest rates on such savings are nonexistent. With interest rates at an all time low we all need to remember the distinctions you make in your post.
    Investments should be looked at from a long term perspective. The investments made before the crash would have been scary if you failed to keep the long view. For those that did nothing,there were no real losses as of today. For those that panicked, they took it on the chin.

  • Aram Durphy says:

    Yes, investment objective is key. Investing is for long-term growth. Savings are for needs you know will come up soon (saving for a car or house) or might come soon (emergency). The real risk in the stock market is volatility, and a savings account has zero volatility.

  • Shawn says:

    Hi Jackie, Woh ! that’s very easy to understand article. I think risk and emotion both are big factor. If we take low with long term definitely, we go with mutual funds that are saving cum investment and other side if we take high risks with short term here mostly we go with stock or forex market that means full investment (hoping profit with short duration). Your “savings” are usually put into the safest places or products that allow you access to your money at any time. When you “invest,” you have a greater chance of losing your money than when you “save”.

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