Saving and investing your hard-earned money are two strategies key to your overall financial well-being. Whether you save or invest funds depends on what you intend to use the money for later (You should do your best, though, to have established investment and savings accounts.) Here is an overview of each method, including the pros and cons of each option.
Savings: An Intro
Savings is putting cash aside for a specific purpose. While you might be tempted to put your money in a safe place in your home, the safest and smartest option is to open a savings account. Not only is your money more secure in a bank, you also earn small amounts of interest.
Savings can be used for many things, including money for an emergency or for a down payment on a home. You can also set up a savings account for a big occasion like a graduation party or vacation. Below are some pros and cons of saving, and explanations of each.
Easily accessible. One benefit of saving your money rather than investing it is your money is easily accessible. When you need cash, you can easily go to your bank and withdraw funds at any time.
Low risk. Unlike some investments, when you set money aside in a savings account, you are not putting your funds at risk. Savings accounts are stable and do not fluctuate with the stock market. Also, funds are insured by the Federal Deposit Insurance Corporation (FDIC). This means that if anything ever happens to your savings, the FDIC will cover up to $250,000 per depositor, per FDIC-insured bank.
Low-interest rates. With low risks come low returns. Interest rates on savings accounts are lower than almost any other account, including certificates of deposit. If you plan on leaving your money in an account for more than a few months, you may want to consider a different type of account that delivers a slightly higher interest rate.
Withdrawal limits. Federal Regulation D limits the number of withdrawals and transfers account holders can make from their savings accounts. The federal limit is six withdrawals per month. If you exceed this limit, there may be a fine or penalty, though these punishments vary by financial institution. There is no limit to the number of deposits you can make to your account.
Investments: An Intro
Investing is a broad term for using your money to buy exchange-traded funds (ETFs), stocks, trusts, bonds, etc., to earn profitable returns. Investments earn money through interest, dividends and capital gains. If you are new to investing, you can read our article Simple Advice for the New Investor for some basic information.
Earn returns. When you purchase a stock, bond, or other investment vehicle, you do so with the hope that your investment will appreciate over time and earn money. When compared with other investments, stocks typically have the highest average returns. However, they come with higher risks.
Multiple choices. When looking to invest your money, you have a lot of choices. Not only can you select what you want to invest in, like the options listed above, you also have a wide range of companies to choose from. There are over 2,400 publicly traded companies on the New York Stock Exchange alone.
Somewhat risky. Different kinds of investments have different risks. Typically, the amount of risk correlates with the potential for higher returns. For instance, stocks are typically riskier than bonds; however, the returns on bonds are not as significant as those of stocks. While there is great potential to earn income with investments, there is also the chance you can lose money. There is no guaranteed return on any investment.
Harder to access. When you decide to withdraw your money from your savings account, you simply go to the bank and make a withdrawal. When you decide to cash out an investment, it's harder. While it's best to invest for the long term, if you decide to sell, for example, a stock, you have to place a sell order (hopefully, you're selling your shares for a profit) and wait for funds to become available. In addition, depending on how long you've held the investment, you'll have to pay either short or long-term capital gains taxes.
Whether you put the bulk of your money into a savings account or into investments depends on various factors. Both saving and investing are important for overall financial security. To learn more about saving, investing and financial management, check out our other finance articles.